The effect of increasing health disaster risk and public spending on economy conditions: a DSGE perspective

Abstract

PurposeThe main motivation of the present study is to understand the severity of the effect of health shock on Iran's oil economy and analyze the role of government under these conditions.Design/methodology/approachDynamic stochastic general equilibrium (DSGE) models can show the precise interactions between market decision-makers in the context of general equilibrium. Since the duration of the virus outbreak and its effect on the economy is not known, it is more appropriate to use these models.FindingsThe results of the survey of hands-on policies scenarios compared to the state of hands-off policy indicate that the effect of government expending shocks on the economy under pandemic disease conditions has much less feedback on macroeconomic variables.Originality/valueAs a proposed policy, it is recommended that the government play a stabilizing role under pandemic disease conditions.Key messages There is no study regarding health shock and its economic effects in Iran using DSGE models. Also, in foreign studies, the health shock in an oil economy has not been modeled.The general idea in the present study is how the prevalence of a pandemic infectious disease affects the dynamics of macroeconomic variables.In three different scenarios, according to the persistence of health disaster risk and the deterioration rate of health capital due to this shock, the model is simulated.In modeling pandemic diseases, quarantine hours are considered as part of the total time of individuals.According to the research findings, it is recommended that the government, as a policy-maker, play a stabilizing role under pandemic crises conditions.