Infectious diseases and endogenous fluctuations

This paper develops a framework to study the economic impact of infectious diseases by integrating epidemiological dynamics into a discrete time one sector growth model. An infectious disease with SIS dynamics affects the labor force and the infected individuals are too ill to work. The susceptible (healthy) individuals choose how much labor to supply so that the effective labor supply comprises of the proportion of healthy individuals (extensive margin) and their labor supply (intensive margin). The epidemiology of disease transmission is modeled explicitly and the global dynamics of the economic variables is studied. Depending on how infectious the disease is, the disease may be eradicated or become endemic. If the disease is infectious enough, cycles and chaos emerge in the economy. A leading example illustrates the model: we show how the system dynamics change as the parameters vary and how the intensive margin responds to changes in the extensive margin due to the spread of diseases. We show how the fluctuations can be stabilized via disease control methods.