The COVID-19 Pandemic in a Monetary Schumpeterian Model

ABSTRACT

In this paper, following Blanchard and Fischer (1989), I investigate how the presence of the COVID-19 pandemic-the increase in the probability of death-may affect growth and welfare in a scale-invariant R&D-based Schumpeterian model. Without money, the increase in the probability of death has no effect on long-run growth and a negative effect on welfare. By contrast, when money is introduced via the cash-in-advance (CIA) constraint on consumption, the increase in the probability of death decreases long-run growth and welfare under elastic labor supply. Calibration shows that the quantitative effect of an increase in the probability of death on welfare is much larger compared to that on growth.