Martin S. Eichenbaum, Sergio Rebelo, Mathias Trabandt

Bibliographic Information

NBER Working Paper No. 27104
Issued in May 2020
NBER Program(s):EFG, HE

Available Formats


Epidemiology models used in macroeconomics generally assume that people know their current health status. In this paper, we consider a more realistic environment in which people are uncertain about their health status. We use our model to study the impact of testing with and without quarantining infected people. We find that testing without quarantines can worsen the economic and health repercussions of an epidemic. In contrast, a policy that uses tests to quarantine infected people has very large social benefits. Critically, this policy ameliorates the sharp tradeoff between declines in economic activity and health outcomes that is associated with broad-based containment policies like lockdowns. This amelioration is particularly dramatic when people who recover from an infection acquire only temporary immunity to the virus.

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