The COVID-19 Pandemic and Economic Growth: Theory and Simulation

Abstract

The outbreak of COVID-19 pandemic has caused profound consequences on world economy. In order to explore the long-term impact of the pandemic on economic growth and the effects of different policy responses, this paper combines economic theory with epidemiological model to construct an interdisciplinary model, in which labor supply is dynamically constrained by pandemic conditions. Analysis of model equilibrium suggests that outbreaks of infectious disease reduce labor supply and negatively affect economic output. The accumulation of health capital can suppress the spread of disease and improve the recovery rate of infected individuals, which will alleviate the labor supply constraint caused by the pandemic and lead to an increase in output and consumption. The model is then calibrated to Chinese economy. The simulation results imply that government's public health policy can enhance the role of health capital in promoting economic growth. But the marginal effect of certain policies is diminishing. Therefore, the government needs to balance pandemic prevention and control costs and marginal benefits when formulating public health policies. When the pandemic is under control, the resumption of production is feasible and the economic stimulus package could lead to economic recovery.

Keywords: COVID-19 pandemic; economic growth; health capital; interdisciplinary analysis; public health.