On the economic growth equilibria during the Covid-19 pandemic

Abstract

The aim of this paper is to study the effects of the Covid-19 pandemic suppression policies (i.e. containment measures or lockdowns) on labor supply, capital accumulation, and so the economic growth. We merge an epidemic SIS population model and a Solow’s type growth model, i.e. we propose a fusion between economics and epidemiology. We show the creation and the destruction of economic growth equilibria driven by the suppression policies and by the severity of the disease. The dynamic stability properties of the equilibria are mainly determined by (i) the stringency of the suppression policies, (ii) the proportion of infected workers, (iii) the recovery rate of workers, and (iv) the economy’s saving rate. Thus, economies can fall into the stable equilibrium of the poverty trap if the propensity to save is low and the economic policies that reduce the spread of infection are severe enough with high levels of infection and low rates of illness recovery. Otherwise, with high savings rates and if the suppression policies perform in such a way that infection levels are low and recovery rates are high, then the economies converge towards the equilibrium of high economic growth with capital accumulation. The scenario is rather complex since there is a multiplicity of equilibria such that economies can be in one scenario or another, characterized by stability or (structural) instability, i.e. bifurcation paths. Numerical simulations corroborate our results.