Business Cycle and Health Dynamics during the COVID-19 Pandemic. A Scandinavian Perspective
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We use a unique measure of daily economic activity and manually audited nonpharmaceutical intervention (NPI) indexes for Noway and Sweden to model the joint dynamic interaction between COVID-19 policy, health, and business cycle outcomes within a SVAR framework. Our analysis documents potentially large measurement errors in commonly used containment policy measures, and significant endogeneity between the model’s variables. Assuming reduced rank for the stochastic elements of the model and applying sign restrictions, we find that both containment policy shocks and precautionary behavior lowers the pandemic burden, but that containment policies also have significant adverse economic effects. Moreover, we find little support for using mobility statistics as a proxy for economic activity and we document that a large share of the variation in containment policies is driven by forward-looking behavior. Finally, we perform a series of counterfactual simulations highlighting the difference between unexpected and systematic NPI strategies, and the nexus between the Norwegian and Swedish experience in particular.