The COVID-19 Pandemic in a Monetary Schumpeterian Model

He, Qichun (2020): The COVID-19 Pandemic in a Monetary Schumpeterian Model. Forthcoming in: Frontiers of Economics in China

Abstract

In this paper, we investigate how the presence of the COVID-19 pandemic---the increase in the probability of death, following Blanchard and Fischer (1989)---may affect growth and welfare in a scale-invariant R&D-based Schumpeterian model. Without money, the increase in the probability of death has no effect on long-run growth and a negative effect on welfare. By contrast, when money is introduced via the cash-in-advance constraint on consumption, the increase in the probability of death decreases long-run growth and welfare under elastic labor supply. Calibration shows that the quantitative effect of an increase in the probability of death on welfare is much larger compared to that on growth.

• Item Type: MPRA Paper
• Language: English
• Keywords: the COVID-19 pandemic; cash-in-advance constraint on consumption; Schumpeterian model
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O42 - Monetary Growth Models

References

Acemoglu, D., Makhdoumi, A., Malekian, A., and Ozdaglar, A., 2020. "Testing, Voluntary Social Distancing and the Spread of an Infection." http://economics.mit.edu/files/19985. Atkeson. A., 2020. "What will be the economic impact of covid-19 in the US? rough estimates of disease scenarios." Technical report, National Bureau of Economic Research. Barro, R., Ursúa, J.F., and Weng, J., 2020. "The Coronavirus and the Great Influenza Pandemic: Lessons from the `Spanish Flu' for the Coronavirus's Potential Effects on Mortality and Economic Activity." NBER Working Paper No. w26866. Blanchard, O., and Fischer, S., 1989. Lectures on Macroeconomics. MIT Press, Cambridge. Chu, A. and Cozzi, G. 2014. "R&D and economic growth in a cash-in-advance economy." International Economic Review, 55: 507--524. Chu, A., Cozzi, G., Fan, H., Furukawa, Y., and Liao, C.H., 2019. "Innovation and Inequality in a Monetary Schumpeterian Model with Heterogeneous Households and Firms," Review of Economic Dynamics 34: 141-164. Chu, A., Cozzi, G., and Liao, C. 2013. "Endogenous fertility and human capital in a Schumpeterian growth model," Journal of Population Economics 26(1): 181-202. Clower, R.W. 1967. "A Reconsideration of the Microfoundation of Monetary Theory." Western Economic Journal 6(1): 1-8. Dotsey, M., and Sarte, P., 2000. "Inflation uncertainty and growth in a cash-in-advance economy." Journal of Monetary Economics 45: 631-655. He, Q. 2018a. "Inflation and Fertility in a Schumpeterian Growth Model: Theory and Evidence." International Review of Economics and Finance 58: 113-126. He, Q. 2018b. "Inflation and Health in a Schumpeterian Growth Model: Theory and Evidence." Economic Modelling 75: 159-168. He, Q. 2018c. "Inflation and Innovation with a Cash-in-Advance Constraint on Human Capital Accumulation." Economics Letters 171: 14-18. He, Q., and Zou, H., 2016. "Does Inflation Cause Growth in the Reform-era China? Theory and Evidence." International Review of Economics and Finance 45: 470--484. Jordà, Ò., Singh, S., and Taylor, A., 2020. "Longer-Run Economic Consequences of Pandemics," Federal Reserve Bank of San Francisco Working Paper 2020-09. Laincz, C. and Peretto, P. 2006. "Scale effects in endogenous growth theory: An error of aggregation not specification," Journal of Economic Growth, 11(3): 263--88. Lucas. R.E. 1980. "Equilibrium in a Pure Currency Economy." Economic Inquiry 18(2): 203-220. Manski, C., and Molinari, F., 2020. "Estimating the COVID-19 infection rate: Anatomy of an inference problem." Journal of Econometrics (forthcoming). Prettner, K., 2013. "Population aging and endogenous economic growth," Journal of Population Economics 26(2): 811-834. Prettner, K., 2014. "The non-monotonous impact of population growth on economic prosperity," Economics Letters 124(1): 93-95. Prettner, K. and Trimborn, T. 2012. "Demographic change and R&D-based economic growth: Reconciling theory and evidence," Center for European, Governance and Economic Development Research Discussion Papers 139. Segerstrom, P., 1998. "Endogenous growth without scale effects." American Economic Review, 5, 1290--1310. World Trade Organization, 2020, https://covid19.who.int/. Yaari, M.E., 1965. "Uncertain lifetime, life insurance and the theory of the consumer." The Review of Economic Studies 32(2): 137--150.