The Design of a Dynamic Stochastic General Equilibrium Model to aim of Investigate the Effect of Pandemic Disease Outbreak on the Dynamics of Macroeconomic Variables

Document Type : Research Paper

Authors

1 PhD Student in Economics, Shahid Bahonar university of Kerman

2 Associate Professor of Economics, Shahid Bahonar university of Kerman

3 Professor of Economics, Shahid Bahonar university of Kerman

4 Assistant Professor of Economics, Kharazmi University

Abstract

The coronavirus outbreak in December 2019 quickly became a public health crisis, first affecting the Chinese economy and then the global economy. This issue led to the use of various models to modelling the prevalence of the virus. The present study is aimed to understand the effect of a pandemic outbreak on Iranian’s economy within the framework of a Dynamic Stochastic General Equilibrium model. To do this, after calibrating the parameters based on the quarterly information of Iran's economy during the period 1991-2016, in different scenarios and according to the persistence of health disaster risk, model simulation was performed. The results showed that the outbreak of a pandemic reduced working hours and consequently the marginal productivity of physical capital; Thus physical investment, production, and total consumption are reduced. Based on the research findings, it is recommended that the government, as a policy-maker, play a stabilizing role under pandemic disease conditions

Keywords

Main Subjects


  1. cemoglu, D., & Johnson, S. (2007). Disease and development: the effect of life expectancy on economic growth. Journal of political Economy, 115(6), 925-985.
  2. Agénor, P. R., & Moreno-Dodson, B. (2006). Public infrastructure and growth: New channels and policy implications (Vol. 4064). World Bank Publications.
  3. Arndt, C., & Lewis, J. D. (2000). The macro implications of HIV/AIDS in South Africa: a preliminary assessment. South African Journal of Economics, 68(5), 380-392.
  4. Bahrami, j., Ghoreishi, N. S. (2011). Analyzing the Monetary Policy in Iran Economy by Using a Dynamic Stochastic General Equilibrium Model.Economic Modeling, 5(1), 1-22 (In Persian).
  5. Barro, R. J., & Ursua, J. F. (2008). Consumption disasters in the twentieth century. American Economic Review, 98(2), 58-63.
  6. Brunner, K., & Meltzer, A. (1983). Econometric policy evaluation: A critique. In Theory, Policy, Institutions: Papers from the Carnegie-Rochester Conferences on Public Policy (Vol. 1, p. 257). North Holland.
  7. Castro, F. E. (2020). Fiscal policy during a pandemic. FRB St. Louis Working Paper, 2020-006.
  8. Cuddington, J. T. (1993). Modeling the Macroeconomic Effects of AIDS, with an Application to Tanzania. The World Bank Economic Review, 7(2), 173-189.
  9. Cuddington, J. T., & Hancock, J. D. (1994). Assessing the impact of AIDS on the growth path of the Malawian economy. Journal of Development Economics, 43(2), 363-368.
  10. Esmailipour Masouleh, E., Shirinbakhsh, S., & Ebrahimi, I. (2017). The Effect of External Shocks on Iran’s Oil Economy: A DSGE-BVAR Approach. Quarterly Journal of Applied Theories of Economics, 4(2), 49-78 (In Persian).
  11. Fakhrehoseini, F. (2011). The Dynamic Stochastic General Equilibrium Model of Monetary Business Cycle for Iran. jemr, 1(3), 1-28 (In Persian).
  12. Fattahi, S., Soheili, K., Reshadat, S., & Karimi, P. (2014). Relationship between human capital of Health and economic growth in OPEC countries. Journal of healthcare management, 3(3), 37-51 (In Persian).
  13. Greenwood, J., Hercowitz, Z., & Huffman, G. W. (1988). Investment, capacity utilization, and the real business cycle. The American Economic Review, 402-417.
  14. Grossman, M. (1999). The human capital model of the demand for health. NBER Working paper, (w7078).
  15. Haacker, M. (2002). The economic consequences of HIV/AIDS in Southern Africa.
  16. Hall, R. E., & Jones, C. I. (2007). The value of life and the rise in health spending. The Quarterly Journal of Economics, 122(1), 39-72.
  17. Halliday, T. J., He, H., Ning, L., & Zhang, H. (2019). Health investment over the life-cycle. Macroeconomic Dynamics, 23(1), 178-215.
  18. Hansen, G. D., & Wright, R. (1992). The labor market in real business cycle theory. Federal Reserve Bank of Minneapolis Quarterly Review, 16(2), 2-12.
  19. Hassanzadeh Jezdani, A.R. (2020). Investigating the repercussion of macroeconomic variables to taxes in the Iranian economy in the framework of the dynamic equilibrium general equilibrium model. Journal of Development and Capital, 5(2), 85-104 (In Persian).
  20. (2021). Policy Tracker. Retrieved from: https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19#I.
  21. Johnson, N. P., & Mueller, J. (2002). Updating the accounts: global mortality of the 1918-1920" Spanish" influenza pandemic. Bulletin of the History of Medicine, 105-115.
  22. Karlsson, M., Nilsson, T., & Pichler, S. (2014). The impact of the 1918 Spanish flu epidemic on economic performance in Sweden: An investigation into the consequences of an extraordinary mortality shock. Journal of health economics, 36, 1-19.
  23. King, R. G., Plosser, C. I., & Rebelo, S. T. (1988). Production, growth and business cycles: I. The basic neoclassical model. Journal of monetary Economics, 21(2-3), 195-232.
  24. King, R. G., Plosser, C. I., & Rebelo, S. T. (1988). Production, growth and business cycles: II. New directions. Journal of Monetary Economics, 21(2-3), 309-341.
  25. Kydland, F. E. (2021). Business Cycles and Aggregate Labor Market Fluctuations (pp. 126-156). Princeton University Press.
  26. Kydland, F. E., & Prescott, E. C. (1982). Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at. Econometrica, 50(6), 1345-1370.
  27. Martin, E., Sergio, R., & Mathias, T. (2020). The Macroeconomics of Epidemics. Cambridge, MA, w26882.
  28. McKibbin, W., & Fernando, R. (2021). The global macroeconomic impacts of COVID-19: Seven scenarios. Asian Economic Papers, 20(2), 1-30.
  29. McNeill, W. H. William H. McNeill (historian).
  30. Nelson, C. R., & Plosser, C. R. (1982). Trends and random walks in macroeconmic time series: some evidence and implications. Journal of monetary economics, 10(2), 139-162.
  31. Parvin, S., Ebrahimi, I., & Ahmadian, A. (2014). Analysis of the Impact of Banking System's Balance Sheet Shocks on Output and Inflation in Iranian Economy. Economics Research, 14(52), 149-186 (In Persian).
  32. Perrings, C., Castillo-Chavez, C., Chowell, G., Daszak, P., Fenichel, E. P., Finnoff, D., ... & Springborn, M. (2014). Merging economics and epidemiology to improve the prediction and management of infectious disease. EcoHealth, 11(4), 464-475.
  33. Perrings, C. (2014). Our Uncommon Heritage: Biodiversity Change, Ecosystem Services, and Human Well-Being. Cambridge University Press.
  34. Prah Ruger, J., Jamison, D. T., Bloom, D. E., & Canning, D. (2011). Health and the economy. Global Health: Diseases, Programs, Systems, and Policies, 757-814.
  35. Rafei, M., & Bahrami, J. (1393). Investigating the impact of shocks on the economy through fiscal policy (Dynamic Stochastic General Equilibrium approach). M.A. Thesis, Allameh Tabataba'i University (In Persian)
  36. Sayadi, M., & Khosroshahi, M. K. (2020). Assessing Alternative Investment Policies in a Resource-Rich Capital-Scarce Country: Results from a DSGE analysis for Iran. Energy Policy, 146, 111813.
  37. Shahriari, Z., & Bakhshi Dastjerdi, R. (2018). Designing a New Keynesian Dynamic Stochastic General Equilibrium Model for Iran҆s Under-Full Employment Economy. M. A. Thesis, University of Isfahan (In Persian).
  38. Smith, R. D. (2006). Responding to global infectious disease outbreaks: lessons from SARS on the role of risk perception, communication and management. Social science & medicine, 63(12), 3113-3123.
  39. Sobhanian, S. M. H., Rowhani, S. A., & Ghiasi Sh, M. (2020). About opposition Coronavirus Outbreak (Review of economic effects and suggestions for managing its consequences). Islamic Parliament Research Center Of The Islamic Republic Of IRAN, (1), 2-3 (In Persian).
  40. Soleymanzadeh, I., Faaljou, H., Heidari, H. (2019). Investigating the Effect of Iran's Oil Revenues Shock on Macroeconomic Variables in the DSGE Model. Quarterly Journal of Applied Theories of Economics, 6(1), 149-182 (In Persian).
  41. Tavakolian, H., & Komijani, A. (2012). Monetary Policy under Fiscal Dominance and Implicit Inflation Target in Iran: A DSGE Approach. Jemr, 2(8), 87-117 (In Persian).
  42. Torój, A. (2013). Why Don’t Blanchard-Kahn ever" Catch" Flu? And How it Matters for Measuring Indirect Cost of Epidemics in DSGE Framework. Central European Journal of Economic Modelling and Econometrics, 5(3), 185-206.
  43. Vali B, H., Bashiri, S., Ismaili P, E., Hooshmand, S., Rahnemon, T., Adabi, B., Muharrami, M., & Gholi P, S. (2020). Investigating the effects of outbreak COVID-19 disease on the world economy and channels affecting the Iranian economy (In Persian).
  44. Vasilev, A. (2017). US Health and Aggregate Fluctuations. Bulletin of Economic Research, 69(2), 147-163.
  45. (1999). Making a difference. Retrieved from Geneva, Switzerland World Health.
  46. (2020). Commodity Markets. Retrieved from World Bank: https://www.worldbank.org/en/research/commodity-markets.
  47. Xu, K., Evans, D. B., Kawabata, K., Zeramdini, R., Klavus, J., & Murray, C. J. (2003). Household catastrophic health expenditure: a multicountry analysis. The lancet, 362(9378), 111-117.
  48. Yang, Y., Zhang, H., & Chen, X. (2020). Coronavirus pandemic and tourism: Dynamic stochastic general equilibrium modeling of infectious disease outbreak. Annals of tourism research, 83, 102913.
  49. Yoo, Byung-Kwang, Megumi Kasajima, and Jay Bhattacharya. Public avoidance and the epidemiology of novel H1N1 influenza A. No. w15752. National Bureau of Economic Research, 2010