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BIS Bulletin No 19: Dealing with Covid-19 – Understanding the Policy Choices

Core Content

This BIS Bulletin explores the economic and health trade-offs involved in responding to the Covid-19 pandemic, focusing on the evaluation of containment policies. It reviews two main approaches used by economists to assess these policies: valuing lives saved and modelling pandemic-macroeconomic interactions.

Main Views and Key Information

1. Valuing Lives Saved

• Containment policies are effective in saving lives but come at a significant economic cost.
• The Value of a Statistical Life (VSL) is a standard tool to quantify the value of lives saved, which helps in comparing health benefits against economic costs.
• Greenstone and Nigram (2020) estimate that moderate social distancing policies in the US could save 530,000 lives per 100 million people over three to four months.
• These lives saved are valued at over one third of US annual GDP, with 90% of the benefits accruing to people aged 50 or older due to their higher mortality risk.
• The stringency of containment policies depends on the comparison between the value of lives saved and the economic cost of shutdowns.

2. Modelling Pandemic-Macroeconomic Interactions

• SIR-macro models integrate classical SIR epidemic models with macroeconomic analysis, allowing for a more comprehensive understanding of the trade-offs.
• These models consider how infection rates are influenced by economic activity, and how containment policies can internalise externalities.
• Graph 2 illustrates three policy responses:
  • Myopic: Households do not adjust their behavior, leading to a small GDP decline and high mortality.
  • Precautionary: Households voluntarily reduce social interactions, leading to a moderate GDP decline and lower mortality.
  • Benevolent: Socially optimal policy that balances health and economic outcomes, resulting in a deeper and earlier economic suppression to reduce infections and deaths.
• The "benevolent" approach is associated with higher social welfare due to the greater health benefits outweighing the economic costs.

3. Economic and Health Outcomes Under Different Assumptions

• The effectiveness of containment policies varies based on epidemiological assumptions, such as the contagiousness and fatality rate of the virus.
• Graph 3 shows how different scenarios affect containment policies and health outcomes:
  • Yellow lines reflect the baseline "benevolent" policy.
  • Blue lines assume ample healthcare capacity, leading to lower mortality.
  • Red lines assume a more infectious but less deadly virus, requiring deeper economic suppression.
• These models highlight the sensitivity of outcomes to assumptions, emphasizing the complexity of real-time policy decisions.

4. Limitations of the Models

• Both VSL-based and SIR-macro models are highly stylised and rely on simplifying assumptions, such as a uniform contact rate.
• State-of-the-art epidemic models are more realistic but have not yet been fully integrated into economic frameworks.
• The economic costs of containment policies may be underestimated, as they do not consider the mitigating effects of macroeconomic stabilisation policies.
• Prolonged shutdowns can have non-linear and persistent economic consequences, including organisational and human capital destruction, which may affect the economy and social fabric long-term.

Conclusion

The Bulletin underscores the importance of balancing health outcomes and economic consequences when designing containment policies. While containment measures are costly, they are necessary to prevent overwhelming healthcare systems and reduce mortality. The VSL and SIR-macro models provide quantitative guidance, but their assumptions and limitations must be acknowledged. The optimal policy response depends on a comprehensive understanding of both the epidemiological and economic dynamics of the pandemic.

References

• Acemoglu, D, V Chernozhukov, I Werning and M Whinston (2020): "A multi-risk SIR model with optimally targeted lockdown"
• Álvarez, F, D Argente and F Lippi (2020): "A simple planning problem for COVID-19 lockdown"
• Bethune, Z and A Korinek (2020): "Covid-19 infection externalities: trading off lives vs livelihoods"
• Boissay, F and P Rungcharoenkitkul (2020): "Macroeconomic effects of Covid-19: an early review"
• Eichenbaum, M, S Rebelo and M Trabandt (2020): "The macroeconomics of epidemics"
• Ferguson, N et al (2020): "Impact of non-pharmaceutical interventions (NPIs) to reduce COVID-19 mortality and healthcare demand"
• Greenstone, M and V Nigram (2020): "Does social distancing matter?"
• Guerrieri, V, G Lorenzoni, L Straub and I Werning (2020): "Macroeconomic Implications of COVID-19"
• Hethcote, H (2000): "The mathematics of infectious diseases"
• Jones, C, T Philippon and V Venkateswaran (2020): "A note on efficient mitigation policies"
• Thunström, L, S Newbold, D Finoff, M Ashworth and J Shogren (2020): "The benefits and costs of using social distancing to flatten the curve for COVID-19"

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