Macroepidemics and unconventional monetary policy

Abstract

Although the current covid-19 pandemic was neither the first nor the last disease to threaten a pandemic, only recently have studies incorporated epidemiology into macroeconomic theory. This paper uses a dynamic stochastic general equilibrium (dsge) model with a financial sector to study the economic impacts of epidemics and the potential for unconventional monetary policy to remedy those effects. By coupling a macroeconomic model with a traditional epidemiological model, we can evaluate the pathways by which an epidemic affects a national economy. We find that no unconventional monetary policy can completely remove the negative effects of an epidemic crisis, save perhaps an exogenous increase in the shares of claims coming from the Central Bank (“epi loans”). To the best of our knowledge, our paper is one of the first to incorporate disease dynamics into a dsge-sir model with a financial sector and examine the use of an unconventional monetary policy.