Epidemics in the Neoclassical and New Keynesian Models

We analyse the e§ects of an epidemic in three standard macroeconomic models. We A?nd that the neoclassical model does not rationalize the positive comovement of consumption and investment observed in recessions associated with an epidemic. Intro- ducing monopolistic competition into the neoclassical model remedies this shortcoming even when prices are completely Aiexible. Finally, sticky prices lead to a larger recession but do not fundamentally alter the predictions of the monopolistic competition model.

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