November 1, 2023

A Benchmark Macroeconomic Model on Excess Deaths, Economic Production’s Losses and Economic Policies During the COVID-19 Pandemic

The COVID-19 Pandemic had an enormous toll on lives, with excess mortality surpassing 27 million people.
It also caused a large loss in economic production, with an expected global GDP loss accumulated from 2020 to 2023 of $26,732 billion (equivalent to 20.47% of the $130,580 billion world GDP in 2019). At the country level, average GDP loss, relative to potential, in the 2020 to 2023 period, is expected to account for 31% of each country’s GDP in 2019.
13,530 million COVID-19 vaccines have been administered worldwide, with 70.6% of the world population receiving at least one dose.
From January 2020 to June 2021, the accumulated fiscal measures to combat the COVID-19 Pandemic accounted for US$10,417 billion (9.7% of World’s GDP), with $1,458 billion (1.4%) in additional health expenditure, $8,882 billion (8.2%) in non-health expenditure.
In addition, from January 2020 to June 2021, worldwide liquidity support accounted for $6,132 billion (6.2%), with $388 billion (0.4%) in equity injections, loans, asset purchases or debt assumptions, $4,054 billion (4.1%) in credit guarantees, and $1,690 billion (1.6%) in quasi-fiscal operations.
From 2019 to 2021, real interest rates decreased, on average, 4.32% with 115 out of 141 countries, with available information, experiencing a reduction in real interest rates.
Thinking about how the COVID-19 virus, excess mortality, production losses and policies are jointly determined is a challenging endeavor.
In this presentation we provide a benchmark macroeconomic model to think about the joint determination of these variables in a Dynamic Stochastic General Equilibrium Model.
Some key characteristics of the model are:
- The economy generates goods and services combining technology, capital, and workers.
- Workers have an endogenous excess mortality rate which is a positive function of preconditions and COVID-19, and a negative function of policies intended to reduce excess mortality.
- COVID-19 increases with its spread, which in turn is a positive function of the exposure of workers due to production needs and a negative function of policies intended to reduce contagion, and it decreases with the recovery rate.
- In this benchmark version we assume that policy positively responds to COVID-19 and its cost reduces the consumption and investment possibilities.
- This model can be extended to accommodate different type of policies affecting different dimensions of the optimality rules, for example financial and monetary policies lowering the real cost of investment.
We present the model with its solution in terms of policy and transition functions and impulse response functions.
We show that the model’s endogenous variables, as output, excess mortality, and COVID-19 are a function of state variables and shocks.
The impulse response function to a policy shock lowers COVID-19 and excess mortality. This increases available workers and incentivizes investment, yielding higher production.
The impulse response function to the recovery rate reduces COVID-19 and therefore excess mortality and the required policies. This allows an increase in workers and incentivizes investment that increases output.
The impulse response function to preconditions increases excess mortality and lowers labor input and investment, which reduces production.
This model serves as an initial framework to study how policies implemented in different countries during the COVID-19 pandemic could have contributed to reducing their excess mortalities and GDP losses.