Pandemic Lockdown: The Role of Government Commitment

Moser, Christian and Yared, Pierre (2020): Pandemic Lockdown: The Role of Government Commitment.

Abstract

This note studies optimal lockdown policy in a model in which the government can limit a pandemic's impact via a lockdown at the cost of lower economic output. A government would like to commit to limit the extent of future lockdown in order to support more optimistic investor expectations in the present. However, such a commitment is not credible since investment decisions are sunk when the government makes the lockdown decision in the future. The commitment problem is more severe if lockdown is sufficiently effective at limiting disease spread or if the size of the susceptible population is sufficiently large. Credible rules that limit a government's ability to lock down the economy in the future can improve the efficiency of lockdown policy.

• Item Type: MPRA Paper
• Language: English
• Keywords: Coronavirus, COVID-19, SIR Model, Optimal Policy, Rules, Commitment, Flexibility
• Subjects: E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E61 - Policy Objectives ; Policy Designs and Consistency ; Policy Coordination; H - Public Economics > H1 - Structure and Scope of Government > H12 - Crisis Management; I - Health, Education, and Welfare > I1 - Health > I18 - Government Policy ; Regulation ; Public Health

References

Aguiar, Mark, Manuel Amador, and Gita Gopinath, “Investment Cycles and Sovereign Debt Overhang,” The Review of Economic Studies, 2009, 76 (1), 1–31.

Alvarez, Fernando E., David Argente, and Francesco Lippi, “A Simple Planning Problem for COVID-19 Lockdown,” NBER Working Paper No. 26981, 2020.

Amador, Manuel, Iván Werning, and George-Marios Angeletos, “Commitment vs. Flexibility,” Econometrica, 2006, 74 (2), 365–396.

Athey, Susan, Andrew Atkeson, and Patrick J. Kehoe, “The Optimal Degree of Discretion in Monetary Policy,” Econometrica, 2005, 73 (5), 1431–1475.

Atkeson, Andrew, “Lockdowns and GDP Is There a Tradeoff?,” 2020.

Atkeson, Andrew, “What Will Be the Economic Impact of COVID-19 in the US? Rough Estimates of Disease Scenarios,” NBER Working Paper No. 26867, 2020.

Bartik, Alexander W., Marianne Bertrand, Zoe B. Cullen, Edward L. Glaeser, Michael Luca, and Christopher T. Stanton, “How Are Small Businesses Adjusting to COVID-19? Early Evidence from a Survey,” NBER Working Paper No. 26989, 2020.

Berger, David W., Kyle F. Herkenhoff, and Simon Mongey, “An SEIR Infectious Disease Model with Testing and Conditional Quarantine,” NBER Working Paper No. 26901, 2020.

Chari, Varadarajan V. and Patrick J. Kehoe, “Sustainable Plans,” Journal of Political Economy, 1990, 98 (4), 783–802.

Dovis, Alessandro and Rishabh Kirpalani, “Rules without Commitment: Reputation and Incentives,” NBER Working Paper No. 26451, 2019.

Eichenbaum, Martin S., Sergio Rebelo, and Mathias Trabandt, “The Macroeconomics of Epidemics,” NBER Working Paper No. 26882, 2020.

Ferguson, Neil M., Daniel Laydon, Gemma Nedjati-Gilani, Natsuko Imai, Kylie Ainslie, Marc Baguelin, Sangeeta Bhatia, Adhiratha Boonyasiri, Zulma Cucunubá, Gina Cuomo-Dannenburg, Amy Dighe, Ilaria Dorigatti, Han Fu, Katy Gaythorpe, Will Green, Arran Hamlet, Wes Hinsley, Lucy C. Okell, Sabine van Elsland, Hayley Thompson, Robert Verity, Erik Volz, Haowei Wang, Yuanrong Wang, Patrick G. T. Walker, Caroline Walters, Peter Winskill, Charles Whittaker, Christl A. Donnelly, Steven Riley, and Azra C. Ghani, “Impact of Non-Pharmaceutical Interventions (NPIs) to Reduce COVID19 Mortality and Healthcare Demand,” Working Paper, 2020.

Glover, Andrew, Jonathan Heathcote, Dirk Krueger, and José-Víctor Ríos-Rull, “Health versus Wealth: On the Distributional Effects of Controlling a Pandemic,” Working Paper, 2020.

Gourinchas, Pierre-Olivier, “Flattening the Pandemic and Recession Curves,” Working Paper, 2020.

Guerrieri, Veronica, Guido Lorenzoni, Ludwig Straub, and Iván Werning, “Macroeconomic Implications of COVID-19: Can Negative Supply Shocks Cause Demand Shortages?,” NBER Working Paper No. 26918, 2020.

Halac, Marina and Pierre Yared, “Fiscal Rules and Discretion Under Persistent Shocks,” Econometrica, 2014, 82 (5), 1557–1614.

Halac, Marina and Pierre Yared, “Fiscal Rules and Discretion in a World Economy,” American Economic Review, 2018, 108 (8), 2305–34.

Halac, Marina and Pierre Yared, “Commitment vs. Flexibility with Costly Verification,” Journal of Political Economy, forthcoming.

Hall, Robert E., Charles I. Jones, and Peter J. Klenow, “Trading Off Consumption and COVID-19 Deaths,” Working Paper, 2020.

Jones, Callum J., Thomas Philippon, and Venky Venkateswaran, “Optimal Mitigation Policies in a Pandemic: Social Distancing and Working from Home,” NBER Working Paper No. 26984, 2020.

Kaplan, Greg, Benjamin Moll, and Gianluca Violante, “Pandemics According to HANK,” Slides, 2020.

Kermack, William O. and Anderson G. McKendrick, “A Contribution to the Mathematical Theory of Epidemics,” Proceedings of the Royal Society of London. Series A, Containing papers of a mathematical and physical character, 1927, 115 (772), 700–721.

Klein, Paul, Per Krusell, and Jose-Victor Rios-Rull, “Time-Consistent Public Policy,” The Review of Economic Studies, 2008, 75 (3), 789–808.

Kydland, Finn E. and Edward C. Prescott, “Dynamic Optimal Taxation, Rational Expectations and Optimal Control,” Journal of Economic Dynamics and Control, 1980, 2, 79–91.

Phelan, Christopher, “Public Trust and Government Betrayal,” Journal of Economic Theory, 2006, 130 (1), 27–43.

Piguillem, Facundo and Liyan Shi, “Optimal COVID-19 Quarantine and Testing Policies,” Working Paper, 2020.

Wang, Huwen, Zezhou Wang, Yinqiao Dong, Ruijie Chang, Chen Xu, Xiaoyue Yu, Shuxian Zhang, Lhakpa Tsamlag, Meili Shang, Jinyan Huang et al., “Phase-Adjusted Estimation of the Number of Coronavirus Disease 2019 Cases in Wuhan, China,” Cell Discovery, 2020, 6 (1), 1–8.