The Impact of COVID-19 on macroeconomic variables - A Cross-Country comparison using a heterogeneous agent economy model incorporating Idiosyncratic risk and SIR components

Abstract

This thesis tries to better understand the dynamics of how macroeconomic models, combined with epidemiological models, describe the impact of COVID-19 on economies. Therefore, an epidemiological model (discretized baseline SIR) is integrated in an incomplete markets model, using uncertain labour efficiency, endogenous labour and non-linear taxation of capital and working income. The goal of this setup is to calibrate two model economies. One representing hard, immediate and multiple lockdowns as well as a social distancing policy embedded in a progressive tax system with minimal wages (Austria). The other representing mild, yet longer lasting multiple lockdowns, as well as a mild social distancing policy embedded in a less progressive tax system using minimal wages (United States of America). Based on the model derived and calibrated value of a statistical life as well as the consumption equivalent variation, a comparison of the two model economies transitional dynamics is conducted. These comparisons are based on exchanging lockdown policies of both economies. Consequences on allocation (aggregation of cross-sectional distributions) of the impact of COVID-19 of output, consumption, capital, labour, and investment during the transitional dynamics between the pre- and post-pandemic steady state are displayed. With respect to welfare households in the US model economy are willing to give up to 3.9 % of consumption on average, (3.7 % minimum, 4.1 % maximum) to be allowed to adopt the AUT policy, therefore preferring the AUT pandemic policies. This is measured by the consumption equivalent variation. In comparison to a no lockdown policy, both the AUT policy (multiple, temporary, strict lock-downs with social distancing) and the USA policy (multiple, longer lasting, less-strict lock-downs and social distancing) are preferred by the households. Therefore, are willing to give up 7.7 % in the AUT. vs no-policy case, and 4.1 % in the USA. vs no-policy case, of household consumption to keep the nation states policies. Results for AUT model economies are similar, yet inverted, with respect to nation state policies. Therefore preferring its own policy.