We study quantitatively the optimality of quarantine and testing policies; and whether they are complements or substitutes. We extend the epidemiological SEIR model incorporating an information friction. Our main finding is that testing is a cost-efficient substitute for lockdowns, rendering them almost unnecessary. By identifying carriers, testing contains the spread of the virus without reducing output. Although the implementation requires widespread massive testing. As a byproduct, we show that two distinct optimal lockdown policy types arise: suppression, intended to eliminate the virus, and mitigation, concerned about flattening the curve. The choice between them is determined by a ‘hope for the cure’ effect, arising due to either an expected vaccine or the belief that the virus can be eliminated. Conditional on the policy type, the intensity and duration of the intervention is invariant to both the tradeoff between lives and output and the aversion to GDP variations: the optimal intervention path depends mostly on the virus dynamics.
The neoclassical growth model is extended to include costly intermediated borrowing and lending between households. This is an important extension as substantial resources are used in intermediating the large amount of borrowing and lending between households. In 2007, in the United States, the amount intermediated was 1.7 times GNP, and the resources used in this intermediation amounted to at least 3.4 percent of GNP. The theory implies that financial intermediation services are an intermediate good and that the spread between borrowing and lending rates measures the efficiency of the financial sector.
We study legislators who have a present bias for spending: they want to increase current spending and procrastinate spending cuts. We show that disagreement in legislatures can lead to policy persistence that attenuates the temptation to overspend. Depending on the environment, legislators’ decisions to be fiscally responsible may either complement or substitute other legislators’ decisions. When legislators have low discount factors, their actions are strategic complements. Thus, changes of the political environment that induce fiscal responsibility are desirable as they generate a positive responsibility multiplier and reduce spending. However, when the discount factor is high, the same changes induce some legislators to free ride on others’ responsibility which may lead to higher spending.
__________________________________________________________________________There is a large amount of intermediated borrowing and lending between households. Some of it is intergenerational, but most is between older households. The average difference in borrowing and lending rates is over 2 percent. In this paper, we develop a model economy that displays these facts and matches not only the returns on assets but also their quantities. The heterogeneity giving rise to borrowing and lending and differences in equity holdings depends on differences in the strength of the bequest motive. In equilibrium, the lenders are annuity holders and the borrowers are those who have equity holdings, who live off its income when retired, and who leave a bequest. The borrowing rate and return on equity are the same in the absence of aggregate uncertainty. The divergence between borrowing and lending rates can thus give rise to an equity premium, even in a world without aggregate uncertainty. _____________________________________________________________________________________
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