Search, Infection, and Government Policy

We construct an economic model of epidemiology, in which agents' economic decisions affect epidemic dynamics and vice versa. Agents are randomly matched and trade goods in pairwise meetings. The meeting rate increases in agents' search efforts, and the pathogen can be transmitted from infected agents to susceptible agents in meetings. We calibrate the model to the COVID-19 pandemic in the U.S. The model shows that unless an instrument, such as a vaccine, entirely stops new infections, the pandemic can be persistent due to the non-lasting property of immunity. Output drops because agents search less due to the threat of infections, and trade volumes in each meeting fall. We also conduct counterfactual analyses to study the effects of monetary policy, preventive measures, persistence of immunity, and lockdowns on epidemic dynamics and economic performance.