Gabriel Pontes

Insper
Programa de Mestrado Profissional em Economia
Gabriel de Souza Pontes
Distributives and Output effects of income

transfer after the Covid-19 pandemic shock
São Paulo
2021
Distributives and Output effects of income transfer after

the Covid-19 pandemic shock
Dissertação apresentada ao Programa de

Mestrado Profissional em Economia do Insper
como parte dos requisitos para obtenção do
título de Mestre em Economia.
Área de concentração: Economia dos

Negócios
Linha de pesquisa: Macroeconomia
Insper
Programa de Mestrado Profissional em Economia
Supervisor: Juliana Inhasz

Co-supervisor: Miguel Bandeira
São Paulo
2021
Pontes, Gabriel de Souza.
Distributives and Output effects of income transfer after the Covid-19
pandemic shock. / Gabriel de Souza Pontes. – São Paulo, 2021.
95f.
Dissertação (Mestrado) – Insper

Programa de Mestrado Profissional em Economia, 2021.
Orientador: Juliana Inhasz
Co-orientador: Miguel Bandeira
1. Fiscal Policies. 2. DSGE. 3. Two agents new keynesian. 4. Covid-19
Pandemic. 5. income transfers. 6. Distributives effects. I. Juliana Inhasz. II.Miguel
Bandeira. III. Instituto de Pesquisa e Ensino - INSPER. IV.Departamento de
Economia. V.Distributives and output effects of income transfer after the Covid-
19 pandemic shock .
Distributives and Output effects of income transfer after

the Covid-19 pandemic shock
Dissertação apresentada ao Programa de

Mestrado Profissional em Economia do Insper
como parte dos requisitos para obtenção do
título de Mestre em Economia.
Área de concentração: Economia dos

Negócios
Linha de pesquisa: Macroeconomia
DATA DE APROVAÇÃO: São Paulo, 18 de janeiro de 2021.
BANCA EXAMINADORA
Juliana Inhasz
Orientador
Miguel Bandeira
Co-orientador
Gino Abraham Olivares Leandro

Convidado Interno
Vladimir Kuhl Teles

Convidado Externo
DEDICATION
Para Beatriz e Ítalo.

ACKNOWLEDGEMENTS
Antes de mais nada eu gostaria de agradecer minha mãe, Mônica Aparecida de Souza,
por me permitir sonhar. Nunca foi fácil. Mesmo diante de todas as dificuldades, pude
estudar. E minha mãe sempre fora a ponta nessa lança, me protegendo e limpando os
caminhos para que eu pudesse crescer. Você é enorme parte de tudo.
Nunca caminhei só. Mesmo com meu filho pequeno, tive o maior todo amor e suporte
do amor de minha vida, Beatriz Lorenzi Daniel, que muitas vezes deixei só para ir às
aulas ou mesmo nos incansáveis momentos de estudo. Mas ela sempre esteve ao meu lado,
debatendo as minhas ideias, aprimorando meu trabalho. Não chegaria tão longe sem ti.
Aos meus sogros, Maria Cecília Lorenzi e Mauro Miguel Daniel, que sempre me
apoiaram, cuidando do meu filho quando tudo apertava muito, dando todo o alivio e foco
necessário para que eu me dedicasse. Não seria tão leve sem vocês.
Aos meus orientadores, Juliana Inhasz e Miguel Bandeira, que sempre imaginaram
que seria possível e nunca rebaixaram a minha gana realizar um trabalho que extraísse o
meu melhor. Por todas as conversas e ensinamentos. Não teria direção sem vocês.
Aos amigos que fiz nesse período e que levarei certamente por toda minha vida. Por
todas nossas conversas sobre as teorias que aprendíamos em sala de aula, todas as risadas.
Não seria tão colorido sem vocês.
Ao corpo docente e coordenadoria. Eu não fui fácil. Perguntei demais, cobrei demais.
Mas vocês foram além. Não teria a minha formação sem vocês.
RESUMO
O trabalho desenvolve uma análise quantitativa dos efeitos distributivos em renda e no
produto agregado da economia associados à distintas alternativas de política de transfer-
ência de renda direcionada em resposta à pandemia da doença da COVID-19. O presente
estudo desenvolve um modelo DSGE novo-keynesiano com dois agentes calibrado para
representar a economia brasileira, introduzindo características importantes para traçar
a dinâmica da economia frente à pandemia mencionada, tais como : Viés na demanda
das firmas por trabalhadores mais qualificados cujas funções podem ser exercidas de
maneira remota; Diferente nível de exposição dos agentes Ricardianos e não Ricardianos à
pandemia e suas consequências, reforçando que grande parcela da população brasileira
possui número elevado de comorbidades que elevam o potencial risco associado à doença,
além de estarem mais expostos à contaminação por utilizarem transporte público, não
respeitando o distanciamento necessário, por longas distâncias, além de residirem em
habitações cujos números de moradores são elevados, com baixo acesso a saneamento e
aparelhos públicos de saúde.
No modelo, tal qual encontrado na literatura, a diferente exposição à doença e o viés

introduzido sobre a demanda de mão de obra leva a assimétricos efeitos e perdas econômicas
entre os agentes estudados. Os resultados foram consolidados nos efeitos distributivos na
renda após observado o choque econômico-sanitário decorrente da pandemia da COVID-19,
apresentando a razão entre as rendas dos agentes Ricardianos e não Ricardianos ao serem
aplicadas diferentes desenhos de política de transferência de renda para conter os efeitos
econômicos associados à pandemia. Em todos os exercícios e desenhos considerados, a
razão Produto-Dívida é apresentada como importante métrica para melhor entendimento
dos efeitos positivos e negativos associado a cada política estudada. Assim, o trabalho
apresenta que o dilema enfrentado pelo governo não envolve apenas recursos, mas é preciso
que se pondere os efeitos de curto e longo prazo decorrente do desenho de política adotado.
Palavras-chave: Política Fiscal. DSGE. Modelagem novo-keynesiano com dois agentes.

Pandemia COVID-19. Políticas de transferências. Efeitos distributivos.
ABSTRACT
The work provide a quantitative analysis of the distributives and Output outcomes
associated with alternative bias income transfer policies in response to the COVID-19
pandemic. This study develope a two agents new keynesian DSGE model calibrated to
represent the Brazilian economy, introducing bias work demand from firms to more skilled
workeforce and different level of exposure to the pandemic consequences depending in
which household the agent belongs due to the fact that a relevant portion of the population
have a greater number of commorbities which pose as risk factors to the gravity of the
disease, but also they are also more exposed to contamination, being that they have
to use of public transportation more often and for longer distances. Additionally, they
normally have a higher number of residents per household, low access to sanitation, and
less access to health facilities . In the model, as in the literature, the differential economic
exposure to the pandemic leads uneven economic losses across the agents. We summarize
our findings through the effects on the income distribution across the households after the
pandemic shock, which shows the Ricardian and non-Ricardian income ratio for several
income tranfers policies designs. For all policies design considered, the debt-to-Output
ratio represents a critical metric to the understanding of the positive effects of the transfers
policies. Thus, the choice governments face when designing policy is not just about to use
the resource (transfers in our case), but also pondered for its consequences in the short
and long-term.
Keywords: Fiscal policy. DSGE. Two agents new keynesian. Covid-19 Pandemic. Income
transfers. Distributives effects.
SUMÁRIO EXECUTIVO
O desenho de políticas públicas é um tema de extrema importância na agenda de qualquer
sociedade moderna, sobretudo em um contexto de crise, com destaque à crise decorrente
da pandemia da COVID-19, com reflexos econômicos dramáticos, além do cenário sanitário
devastador.
Com recursos escassos e uma economia em Depressão, o governo brasileiro necessita imple-
mentar políticas que amenizem os reflexos negativos às famílias que mais sofreram e sofrem
com o fechamento dos postos de trabalho, em sua maioria postos que não necessitam de
elevada qualificação e não podem serem performados de maneira remota. Esse número é
grande e reforçado pela literatura que apresentam os Estados Unidos da América possuem
apenas 37% dos postos de trabalho aptos a serem performados de maneira remota. Já no
Brasil apresentamos apenas 18% das vagas podendo serem transferidas para a modalidade à
distância (DANIEL et al., 2020). , ilustrando o enorme desafio que as autoridades brasileiras
têm pela frente. Soma-se a pouca oferta de postos que possibilitam o “home-office”, a
maior incidência de comorbidades tais como obesidade e doenças cardíacas na parcela da
população mais pobre, levando-os, em decorrência das características da COVID-19, a
sofrerem mais com as consequências da doença, conforme os trabalhos de Pires, Carvalho e
XAVIER (2020) no qual extrai-se que os menos escolarizados possuem 58.8% maior chance
de terem comorbidades.
Neste contexto, seguindo uma tendência global de se utilizar a política fiscal como instru-
mento de política econômica para o combate dos efeitos da pandemia, o governo brasileiro,
entre outras medidas, mas focados aqui diretamente nas políticas às famílias, desenvolveu
um programa de transferências de renda chamado auxílio emergencial que transferiu até a
data 01/02/2021 aproximadamente 321.8 bilhões de reais com duração de 5 meses em sua
primeira fase.
Investigando o efeito isolado da política de transferência de renda do governo, o estudo
desenvolvido na presente dissertação busca expandir a discussão e analisar desenhos alter-
nativos de política de transferência de renda, estudando diferentes extensões e montantes
injetado por essa política, buscando entender quais efeitos das mesmas sobre a distribuição
de renda entre os agentes e o produto produzido por esta economia, visando trazer notas e
conclusões relevantes para o debate público. Para conseguir introduzir as características da
economia brasileira e as particularidades do contexto da pandemia, o trabalho desenvolve
um modelo no qual os agentes são divididos em dois grandes grupos no qual é permitido
otimizar a utilidade no decorrer do tempo através de instrumentos financeiros de compra e
venda de títulos de dívida pública e participação nas firmas desta economia; outro grupo no
qual a renda provem de transferências governamentais e da remuneração de seu trabalho.
O modelo ainda conta com firmas, autoridade monetária e autoridade fiscal.
O modelo de equilíbrio geral desenvolvido permite grande flexibilidade e verossimilhança
com a dinâmica da economia brasileira, possibilitando a criação de diferentes cenários,
permitindo avaliações quantitativas importantes, especialmente para um fenômeno em
curso para auxiliar a tomada de decisão do governo.
O trabalho encontrou três importantes importante lições. Primeiramente, A pandemia de
COVID -19 não é um bom equalizador: Em todos os cenários estudados, a pandemia elevou
a desigualdade entre os dois grupos de agentes mencionados anteriormente. A elevação
da desigualdade de renda permaneceu entre o segundo trimestre de 2020 e o final do
trimestre de 2021 (4 trimestres), após apenas uma perturbação de um pico da doença na
economia, e 5 trimestres após uma perturbação com dois picos ou ondas. Secundariamente,
o aumento da relação Dívida-Produto devido à política fiscal é um elemento crítico para
se entender a eficácia de um determinado desenho de política pública. O aperto fiscal
resultante da elevação do endividamento público intensifica a desigualdade da relação
entre as rendas, limitando o efeito positivo das políticas de transferência de renda através
de três canais : (i) O endividamento público é realizado através de venda de títulos a
um dos grupos da sociedade, pagando um prêmio a este grupo, enquanto o outro grupo
não possui acesso a esta possibilidade de diversificação do portifólio;(ii) O aperto fiscal
reduz o espaço orçamentário do governo para investimentos públicos e gastos públicos,
impactando negativamente o produto e, consequentemente, a relação entre rendas, uma
vez que o crescimento do produto tem elevada relação com uma maior equidade de renda;
(iii) A elevação do endividamento provoca uma reação negativa da autoridade monetária,
que ao elevar as taxas básicas de juros desta economia, reduz o investimento privado e o
potencial de crescimento do produto.
Por fim, o estudo demonstra que o desenho da política de transferência importa, tanto em
relação ao montante injetado, quanto pela sua extensão no tempo. Em outras palavras,
não apenas os valores, mas, o número de parcelas pagas pelos programas, influenciam
decisivamente a dinâmica das variáveis macroeconômicas e a distribuição de renda entre
os agentes. Por exemplo: Quando os pagamentos ocorrem de forma mais diluída no tempo,
acompanhando o progresso da perturbação, seus resultados são melhores, seja elevando o
consumo da parcela da população que tem sua renda atrelada unicamente ao seu salário e
transferência, seja pela absorção dos efeitos negativos no produto decorrentes da pandemia.
LIST OF FIGURES
Figure 1 – Proportion of available remote job positions, adapted from world bank
(openknowledge.worldbank.org/handle/10986/34277) . . . . . . . . . . 16
Figure 2 – Population proportion of Comorbity factors by level of education,
adapted from (PIRES; CARVALHO; XAVIER, 2020) . . . . . . . . . . 17
Figure 3 – % GDP injected by governments to mitigate COVID pandemic effects,
source : IMF fiscal monitor . . . . . . . . . . . . . . . . . . . . . . . . . 17
Figure 4 – stilized model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Figure 5 – One wave Covid shock . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Figure 6 – Observed IBC-br index . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Figure 7 – Output dynamics - model- after Covid shock . . . . . . . . . . . . . . . 42
Figure 8 – Observed retail sales index . . . . . . . . . . . . . . . . . . . . . . . . . 43
Figure 9 – Consumption dynamics for Ricardian, non-Ricardian and aggregate -
model- after Covid shock . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Figure 10 – Observed labor hour in transformation industry . . . . . . . . . . . . . 44
Figure 11 – Labor supply dynamics for Ricardian, non-Ricardian and aggregate -
model- after Covid shock . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Figure 12 – Observed real earnings registered and non-registered wages . . . . . . . 45
Figure 13 – Wage dynamics - model- after Covid shock . . . . . . . . . . . . . . . . 46
Figure 14 – One wave Covid shock . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Figure 15 – Two waves Covid shock . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Figure 16 – Output response due income transfers policy after one wave Covid shock 51
Figure 17 – Income distribution response due income transfers policy after one wave
Covid shock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Figure 18 – Public Debt/ Output response due income transfers policy after a
one-wave Covid shock . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Figure 19 – Output response due income transfers policy after two-wave Covid shock 54
Figure 20 – Income distribution response to income transfer policies after two-waves
Covid shock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Figure 21 – Public Debt/ Output response due income transfers policy after two-
waves Covid shock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Figure 22 – Output response due specific income transfers policy after two-wave
Covid shock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Figure 23 – Income distribution response due specific income transfers policy after
two-waves Covid shock . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Figure 24 – Public Debt/ Output response due specific income transfers policy after
two-waves Covid shock . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Figure 25 – Model policy function . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Figure 26 – Selected model output variables from one-wave COVID shock . . . . . 77
Figure 27 – Selected model output variables from one-wave COVID shock . . . . . 78
Figure 28 – Selected model output variables from two-wave COVID shock - no
specific policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Figure 29 – Selected model output variables from two-wave COVID shock - no
specific policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Figure 30 – Selected model output variables from two-wave COVID shock - specific
policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Figure 31 – Selected model output variables from two-wave COVID shock - specific
policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Figure 32 – Total cases and deaths in developing countries, Brazil, and world, source:
ECDC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Figure 33 – GDP forecast for 2020 and 2021, source : IMF. . . . . . . . . . . . . . . 88
Figure 34 – ν sensitivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Figure 35 – Alternative specification model’s output for selected variables 1 . . . . 93
Figure 36 – Alternative specification model’s output for selected variables 2 . . . . 94
LIST OF TABLES
Table 1 – Summary of the calibration . . . . . . . . . . . . . . . . . . . . . . . . . .
39
Table 2 – Income transfers strategy scenarios - one-wave . . . . . . . . . . . . . . 50
Table 3 – Income transfers strategy scenarios - 1 - two-wave . . . . . . . . . . . . 50
Table 4 – Income transfers strategy scenarios - 2 - two-waves - specific policy . . . 51
CONTENTS
1 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2 LITERATURE REVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3 MODEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
3.1 Households . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
3.1.1 R households . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
3.1.2 Choice of allocations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
3.1.3 Wage Setting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
3.1.4 NR households . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
3.2 Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
3.2.1 Intermediate-good Firms . . . . . . . . . . . . . . . . . . . . . . . . . . 30
3.2.2 Capital and Labor Inputs . . . . . . . . . . . . . . . . . . . . . . . . . . 30
3.2.3 Pricing Setting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
3.2.4 Final-Goods firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
3.3 Aggregating Prices, Consumption and Wages dynamic . . . . . . . . 34
3.4 Fiscal and Monetary authorities . . . . . . . . . . . . . . . . . . . . . 35
3.5 Market clearing condition . . . . . . . . . . . . . . . . . . . . . . . . . 36
4 CALIBRATION AND SOLUTION . . . . . . . . . . . . . . . . . . . . 37

4.1 Modeling a Pandemic . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
4.1.1 Size and Duration of Covid Shock . . . . . . . . . . . . . . . . . . . . . 40
4.1.2 First Observations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
5 POLICY EXERCISE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
6 CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
BIBLIOGRAPHY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
APPENDIX A – MORE ON THE COVID RELATED LITERATURE 68
APPENDIX B – STEADY STATE EQUATIONS . . . . . . . . . . . . 71
APPENDIX C – MODEL POLICY FUNCTION . . . . . . . . . . . . 73
APPENDIX D – SELECTED MODEL OUTPUT VARIABLES FROM

ONE-WAVE COVID SHOCK . . . . . . . . . . . . . 76
APPENDIX E – SELECTED MODEL OUTPUT VARIABLES FROM
TWO-WAVE COVID SHOCK - NO SPECIFIC POL-
ICY . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
APPENDIX F – SELECTED MODEL OUTPUT VARIABLES FROM

TWO-WAVE COVID SHOCK - SPECIFIC POLICY
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
APPENDIX G – COVID CASES EVOLUTION AROUND THE GLOBE 85
APPENDIX H – ECONOMIC IMPACT - GDP FORECAST . . . . . 87
APPENDIX I – DYNAMIC OF THE MODEL VARYING ν . . . . . 89
APPENDIX J – MODELING THE PANDEMIC ALTERNATIVE SPEC-

IFICATION - DEMAND SHOCK . . . . . . . . . . 92
15
1 INTRODUCTION
On January 30, 2020, the World Health Organization’s (WHO) Director General
classified the COVID-19 (Coronavirus Disease 2019) outbreak as a Public Health Emergency
of International Concern (PHEIC). Little more than 2 months later, on March 11, the
outbreak was declared a pandemic. By that time, numbers around the world amounted
118 thousand cases and 4.2 thousand deaths, according to numbers from WHO’s report
harmonized by the European Center for Disease Prevention and Control (ECDC) (ROSER
HANNAH RITCHIE; HASELL, 2020); Brazil recorded 52 cases by then. Seven months
after the PHEIC declaration, on August 30, 2020, cases and death counts were over 25.6
million and 854 thousand, respectively; Brazil then, ranked second, with 3.9 million cases
and 121.5 thousand deaths (Figure 32 Appendix G).
Deriving largely from the health crisis caused by the COVID-19 outbreak, a deep
economic recession has spread on countries and states, leading to historical lows in
indicators of economic activity (Figure 33 Appendix H).
Exposure and vulnerability to the Covid pandemic As a consequence of
the pandemic, thousands of people found themselves in a home office situation overnight
((DINGEL; NEIMAN, 2020); (SALTIEL, 2020)), while an even bigger number of people
became jobless or had to be relocated ((KRUEGER; UHLIG; XIE, 2020)). Draws particular
attention the fact that in developing countries the economic effects of the pandemic were
amplified by the inaccessibility of homebased jobs to a great part of the population,
specially the low-income population. According to a World Bank’s report (Who on earth
can work from home) (DANIEL et al., 2020), there is a direct and positive correlation
between the possibility of telework, in one hand, and internet access, income, educational
level, and less informality, on the other. This scenario, presented in Figure 1, leads to great
discrepancy inter and intra-country
Furthermore, low-income population are more susceptible to the serious consequences
resulting from Covid-19, since not only does this portion of the population have a greater
number of commorbities, which pose as risk factors to the gravity of the disease ((PIRES;
CARVALHO; XAVIER, 2020)), as presented in figure 2, but also they are also more
exposed to contamination, being that they have to use of public transportation more often
and for longer distances. Additionally, they normally have a higher number of residents per
household, low access to sanitation, and less access to health facilities. All these factors
culminate in an asymmetric pandemic shock.
Government action to minimize the economic and health effects due to the context
presented is necessary and has been taking place. figure (3) shows the amount of resources
used by emerging countries and the United States to combat the COVID-19 pandemic.
However, it is necessary to evaluate the effects of the transfers on the economy. This
study focuses on understand how different income transfers policies designs affect the
Chapter 1. Introduction 16
Figure 1 – Proportion of available remote job positions, adapted from world bank (open-
knowledge.worldbank.org/handle/10986/34277)
dynamic of wealth distribution and welfare utilizing a DSGE model, calibrated to represent
Brazilian economy, with a two agents new keynesian model that introduce differential
household vulnerability to a COVID shock and firm bias to more qualifed workforce.
Main findings. The work found three important insigths. Firstly, the Covid pan-
demic is not a great equalizer: In all cases studied, the pandemic increased income inequality
between the agents that have access to intertemporal optimization of theirs utility function
(Ricardians) and those who have not (non-Ricardians). The expantion of the income
inequality remains 4 quarters (from QII20 to QI21), after a one-wave pandemic shock, and
of 5 quarters (from QII20 to QII21), after a two-wave shock.
Secondly, the increase of debt-to-Output ratio due to a fiscal policy is critical to
understand the effectiveness of the policy. Fiscal tightening resulting from the increased
indebtedness intensifies income inequality, by diminishing the income transfers positive
effects, through three channels: (i) Indebtedness may be translated in income by the
Ricardian, as opposed to non-Ricardians, since those have access to one-period Government
bonds; (ii) Fiscal tightening reduces Government budgets for both public investment and
consumption, which negatively impacts Output and, consequently, income ratio; (iii)
Increasing indebtedness causes the monetary authority to elevate interest rates (monetary
transmission), reducing private investment and, consequently, Output.
Figure 2 – Population proportion of Comorbity factors by level of education, adapted from

(PIRES; CARVALHO; XAVIER, 2020)
Figure 3 – % GDP injected by governments to mitigate COVID pandemic effects, source :

IMF fiscal monitor
Finally, income transfer policy’s design does matter, both in its volume and extent.
In other words, not only the amount transferred, but also the duration of the installments
influence the dynamics in distributive terms. For instance: when the payments are carried
out in a more diluted manner over time, they seem to be more effective during its execution:
(i) for the one-wave shock scenario, we observe a more sustainable consumption growth
along with a lower debt-to-Output ratio; and (ii) for the two-wave shock scenario, we
observe a buffer effect on it’s harmful effects.
19
2 LITERATURE REVIEW
In order to plunge into the challenge brought to light by the COVID-19 pandemics,
researchers from all over the world are dwelling on various fronts tied to this matter,
hence the rapid growth on weekly publications of different subjects, such as economics (e.g
Centre for economic policy research (CEPR)). Naturally, there are various points of view,
some of which contradict each other, since such literature usually requires time to mature.
This section’s review may be split in 6 blocks: (1) spreading control measures, (2)
impact of the pandemic on consumption, intake and behavior, (3) impacts of the pandemic
on the supply chain,(4) access to telework and inequality, (5) economic effects mitigation
measures, and (6) macroeconomic modelling of the pandemic and the Brazilian economy.
In order to maintain in the main text the literatute that dialogues more close to the
study presented in this work, the block (1) and (2) will be on the Appendix A.
The crisis due to COVID-19 does not only affect the demand (see Appendix A), but
also the supply. Brinca, Duarte e Castro (2020) show that approximately two thirds of the
impact on the rise of working hours between March and April were caused by the supply
shock caused by spreading control policies, especially in sectors like leisure and tourism.
Bekaert, Engstrom e Ermolov (2020) find similar medium term results: according to the
authors, demand shock effects prevail in the beginning of the pandemic, while supply
shock effects prevail in the second trimester of the pandemic. They suggest there will be a
slow recovery rate due to persistent effects of the latter.
The persistency and depth of the supply chock due to the COVID-19 pandemics
may be explained by relation between the productive agents and by its chain constitution
(supply chain). The interruption of one element in the supply chain may negatively impact
all subsequent elements. Inoue e Todo (2020) use a agent based model to reproduce the
current production scenery in Japan (1.6 million companies), simulating the effect out of
Tokyo of the lockdown measures imposed in the city. Results show that they are twice as
big than in the Japanese capital, causing a 5.3% reduction on the country’s GDP.
Besides, the majority of the world’s population is unable to work remotely, which
in some cases may mean losing their jobs. Dingel e Neiman (2020), using surveys which
describe 1000 occupation’s working’s experience in USA, classify them as able or unable
to be done entirely from home. They found that only 37% are able to be done from
home and that those are the jobs that typically pay more, accounting for 46% of the
wages in the country. Adopting a similar methodology, Saltiel (2020) focuses on developing
countries and find a median of 13% (substantially lower than 37% in USA), and significant
heterogeneity across and within occupations and worker characteristics. Number vary from
5.5% in Gana to 23% in Yunan, China. Saltiel (2020) also points out that more vulnerable
groups, such as workers in low-wage occupations, high school dropouts and self-employed
individuals are less likely to work from home. Delaporte e Peña (2020) presents results
Chapter 2. Literature review 20
similar to Saltiel (2020) and Dingel e Neiman (2020) for Latin America and Caribbean.
Therefore, coronavirus is not the great equalizer it was portrayed to be. According to
Galasso (2020), it is “quite the contrary”: as telework is more viable for highly educated
workers and blue collars, low-income individuals are faced with worse labor market outcomes
and suffered higher psychological costs, therefore the gap between the two groups is actually
growing. Palomino, Rodriguez e Sebastian (2020) evaluate the effect on the COVID crisis
on jobs, based on a Lockdown Working Ability, which contemplate both the ability to
work from home for each occupation and also if the job is considered essential or closed
on a lockdown situation. Contemplating different scenarios of lockdown and lockdown
exit for 29 different European countries, they found an average increase in the headcount
poverty index that goes from 4.9 to 9.4 percentage points and a mean loss rate for poor
workers between 10% and 16.2%. Also, they show that both inequality within and between
countries increase.
However, income is not the only aspect which is bound to be affected by COVID-19.
Pires, Carvalho e XAVIER (2020), presented a report showing that the poor class have
more likelihood to posses one or more comorbidity factors when compared with the upper
class. Alon et al. (2020) and Adams (2020) point out increasing gender inequality and
Bertocchi e Dimico (2020) and Almagro e Orane-Hutchinson (2020) explore it’s negative
effects on racial disparities.
Moreover, the shock provoked by the pandemics also affects companies. Carletti
et al. (2020) forecast a substantial drop in profits and equity shortfall caused by the
lockdown in Italian firms. According to the authors, the effect will be more significant on
small and medium-sized enterprises, for firms with high pre-COVID-19 leverage, and those
belonging to the Manufacturing and Wholesale Trading sectors. Similar results, which
suggest disproportionality between small and big companies, are presented by Bartik et al.
(2020) for USA. Moreover, Schivardi e Romano (2020) estimate 200 thousand Italian firms
may come to liquid shortage in the period.
Elenev, Landvoigt e Nieuwerburgh (2020) studied the impact of The Coronavirus Aid,
Relief, and Economic Security Act – CARESact on the United States’ economy suggesting
a macroeconomic disaster in a scenario of absent policy intervention, negative feedback
loop between corporate default and financial intermediary weakness. They suggest an
alternative, more interventionist, approach, The Payroll Protection Program and Main
Street Lending Program. According to the authors, they would prevent 8.6% in cumulative
output losses and create huge welfare benefits compared to a do-nothing scenario.
The income transfer are being a commom practice from governments over the globe.
Busso et al. (2020) maps transfer policies in 10 Latin American and Caribbean countries,
identifying 33 programs, of which 15 are newly developed to deal with the socioeconomical
effects of the COVID-19 pandemics. The authors conclude that although these rapid
emergency measures cover the lower classes, their effects are limited, thus requiring broader
transfer programs to include lower-middle class.

In addition to the previously presented matters, this thesis aims to contribute with
the pandemic’s economic impact modelling literature, from a macroeconomic point-of-view.
We therefore present next some of the work already published, in order to better map the
context.
Atkeson (2020) correlates the epidemiology of COVID-19, based on a SIR model of
progression for the USA, with economic effects. Eichenbaum, Rebelo e Trabandt (2020)
extrapolate canonical epidemiology model to study the interaction between economic
decisions and epidemics. The model presents a reduction on consumption and working
hours, hence reducing total deaths due to the disease. They argue that even if lockdown
measures may increase the severity of the recession, it is supposed to save roughly half a
million lives in USA.Kaplan, Moll e Violante (2020) provide a quantitative analysis of the
trade-offs between heath outcomes and economic costs in a economy with hetorogeinity of
its agents. They integrate an expanded SIR model into a HANK macroeconomic model and
reports that, for US, the most exposed individuals (rigid positions, mainly in services) are
the ones most vulnerable (less access to liquidity savings) which produces a very unequal
economic consequences of the pandemic and by this, a framework that do not attempt to
work with the heterogeinity within the economy study will fail in their conclusions. Borelli
e Góes (2020) exploits the model proposed by Eichenbaum, Rebelo e Trabandt (2020) for
São Paulo, Amazonas, Ceará, Rio de Janeiro e Pernambuco, in Brasil. Results point to
great heterogeneity, which suggests that each state may require specific measures.
Fornaro e Wolf (2020) employ a simple analytic framework to study what the outcome
of COVID-19 on the economy shall be. The autors point out mainly three results: (1) the
spread of the virus might depress global demand, (2) a supply-demand doom loop might
take place, amplifying the supply disruption directly caused by the virus, and (3) the
global economy may become more vulnerable to stagnation traps, that is episodes of low
growth and high unemployment driven by pessimism. Guerrieri et al. (2020) suggest that
the impact caused by the pandemics may be a Keynesian supply shock, that is a supply
shock that triggers changes in aggregate demand larger than the shock itself. They argue
the shock, in this case, is caused by shutdowns, layoffs, and firm exits.
Safeguarding more vulnerable families and the ones who on which the shock may be
tougher, guaranteeing their consumption patterns is also a recurrent theme. Bayer et al.
(2020) uses a medium-scale HANK model to quantify the effects of both conditional (to
unemployment) and unconditional transfer payments to household on the United States’
economy. The authors found that transfers in general reduce the output loss due to the
pandemic by up to 5% and point to a significant difference between the transfer multiplier
for conditional and unconditional transfers, namely, 0.25 and 1.5. Based on a rather less
complex model, Carroll, Slacalek e White (2020) find similar results. Moreover, Castro
(2020) uses a nonlinear DSGE model to compare different types of fiscal policies, among
which are unemployment insurance (UI) and unconditional transfers. The author finds
that while UI are the most effective measures to support borrowers, savers are favored by
unconditional transfers.
Mihailov et al. (2020) adapts the New Keynesian DSGE model presented by Galí,
Smets e Wouters (2012) in order to capture the macroeconomic effects caused by the
much needed lockdown policies, due to the fact that a significant share of the population
does not have the ability to work from home. The authors analyze different labor supply
shocks and their effect on consumption, quantifying in a broad, plausible range the likely
macroeconomic consequences of the COVID-19 pandemic.
After reviewing the alternative forms of modeling the Covid-19 pandemic, and
defining the analytical framework DSGE as the policy analysis tool of this work, given
its broad use in the literature, and in light of the heterogeneity of agents in the Brazilian
economy, it is necessary to study the literature that contrasts the different approaches to
incorporating heterogeneity in the DSGE framework, in order to accomodate the conclusion
presented in Kaplan, Moll e Violante (2020). Using the definition present in Debortoli, Galí
et al. (2017), the approaches studied are classified into: (1) RANK - representative agent
new keynesian modeling, which has no insertion of heterogeneity between agents, enabling
the translation of its characteristics into an agent that represents the mass of the agents
of this economy; (2) TANK - two agents new keynesian modeling, which incorporates
heterogeneity between individuals who have access to the credit market, making it possible
to smooth consumption and those who do not have the ability to inter-temporally optimize
their utility function; (3) HANK - heterogeneous agents new keynesian modeling, which
inserts an additional dimension of heterogeneity, when compared to TANKs models, the
differentiation of consumption between agents of the same group.
The work of Kaplan, Moll e Violante (2018) reviews the monetary transmission
mechanisms policy on household consumption in different modeling specifications, in
particular RANK, TANK and HANK. According to the authors, the HANK specification
presents robust indirect effects of a cut in the interest rate, operated by the increase in
labor demand, on household consumption, with such effects being superior to the effect
generated by inter-temporal substitution, considered here as a direct effect. The RANK
modeling, which is built on the validity of the permanent income hypothesis, would present
only the direct effects of inter-temporal substitution, such as the transmission mechanism
of monetary policies. According to the authors, such indirect effects would be caused by the
interrelation between monetary policy and a fiscal response, resulting from disturbances
in the government’s budget constraint. Thus, even focusing on the monetary transmission
channels, the work of Kaplan, Moll e Violante (2018) presents the sharing of properties
between the TANK and HANK specifications, by shedding light on the indirect effects
on consumption, the transient changes in income (not impacting on the model RANK)
caused by disturbances, even if small, in fiscal policy, extremely important for the exercise
to be carried out in this work.

Based on the definition of HANK models present in Kaplan, Moll e Violante (2018),
and the challenges imposed by the aforementioned equilibria solution’s framework, Debor-
toli, Galí et al. (2017) seeks to understand to what extent the TANK modeling framework
can capture the main results obtained by the HANK framework, in particular the economic
responses to aggregate shocks, whether monetary or not. The paper introduces two dimen-
sions of heterogeneity compared to the RANK framework. By the authors’ words, "The first
dimension of heterogeneity is given by the difference in average consumption between con-
strained and unconstrained households at any point in time. The dispersion in consumption
within the subset of unconstrained households at any point in time constitute the second
relevant source of heterogeneity". According to the authors, the TANK framework captures
the first heterogeinity dimension, but does not account fo the second one. Therefore, this
work is based on a TANK framework model, classifying the agents as either Ricardians -
those who have acess to the financial markets, and therefore to credit -, or Keynesians -
those who do not have the ability to access credit and smooth their consumption over time.
The work finds that the TANK model adequately estimates the aggregate dynamics of a
canonical HANK in response to aggregate shocks. The authors argue that the similarities
are due to the fact that the non captured dimentions of heterogeinity on the TANK models
does not greatly impact the results, since the consumption’s heterogeinity of Ricardians
remains roughly constant. This fact is a result of their ability to smooth the fluctuations
by borrowing and saving. Ergo, a TANK model could be used to obtain analytical results
to provide economics insights in presence of heterogeneous agents environment and may
be used as a laboratory to test and exercise policies designs.
After debating the proper DSGE framework to use in presence of heterogeinity, and
in order to study the Brazilian economy, we analyzed the literature that uses the DSGE
TANK analytical framework to understand the dynamics of the country’s economy in
the face of disturbances, whether expected or not. We will not exhaust all DSGE model
oriented works applied to the Brazilian economy, nonetheless it is imperative to mention the
work Castro et al. (2015) that was the main tool for formulating the macroeconomic policy
of the Central Bank of Brazil (BCB), incorporating essential elements of the Brazilian
economy such as: (i) a fiscal authority pursuing an explicit target for the primary surplus;
(ii) administered or regulated prices as part of the consumer price index; (iii) external
finance for imports, which amplifies the effects of changes in external financial conditions
on the economy; and (iv) imported goods used in the production of intermediate goods. It
also includes the presence of financially constrained households (non-Ricardians). However,
we will focus on the works that served as a foundation and inspiration for the model
developed in the present work.
Cavalcanti e Vereda (2011)’s major contribution to this work was a small survey on
the calibration of parameters adopted in national and international literature, building
the intervals in which this calibration presents empirically verified results, which serves
as the backbone in the standard calibration of the present study. Carvalho, Valli et al.
(2011) built a model inspired by the work of Coenen, McAdam e Straub (2008), focused
on detailing and understanding the fiscal side of the economy, but adding important
characteristics of the Brazilian economy such as biased government transfers of income,
reflecting important fiscal policies such as the "Bolsa Família" program. In their model,
they introduce public capital as an amplifier, at no cost of firm’s production function.
Another important addition of their work was the wage bias that firms would adopt in
favor of more skilled workers, creating a wage wedge between Ricardian and non-Ricardian
agents.
The work of Cavalcanti et al. (2018) has profound resemblances, in terms of modeling,
to the work of Carvalho, Valli et al. (2011), however innovating in its exercises of fiscal
policies in the face of an increase in interest rates (monetary shock), which are constrained
to sustainability of public debt, represented by the preservation of the public debt-GDP
ratio and the requirement of a government’s budget primary surplus. Their significance to
this work is the analysis of the GDP response when there is an association of an increase in
the interest rate of the economy and different fiscal policies, influencing the present study
regarding the application of DSGE modeling for the design of fiscal policies in response to
an exogenous shock.
Similarly to Fornaro e Wolf (2020),Guerrieri et al. (2020) and Mihailov et al. (2020),
the present work considers the pandemic as an exogenous shock, both in it’s model and
analysis. However, aiming to further contribute with the blooming literature on the matter
and to discuss the effects of the pandemic on a typical emerging country economy, notably
the Brasilian case, we present a TANK model inspired in many features by Carvalho,
Valli et al. (2011). Using a DSGE framework, we consider a severe supply shock induced
by the fear of Covid-19’s consequences and the asymmetry between those more or less
vulnerable to it. In order to distinguish them, these agents were labeled as either Ricardian
or non-Ricardian households, respectively. Subsequently, different income transfers policies
are studied in order to understand the final economic impact on Output dynamics, income
distribution and in the ratio debt-to-Output.
25
3 MODEL
The model consists of a closed economy with four types of economic agents: house-
holds, firms, a fiscal authority, and a monetary authority. We further distinguish between
two households which are classified according to their ability to access financial markets.
Ricardians are those households with access to savings through public bonds and accumu-
lating physical capital, while non-Ricardians have no saving abbility. This introduction,
following a simplified version of Coenen, McAdam e Straub (2008) and its Brazilian version
Carvalho, Valli et al. (2011), allows fiscal policy to have an effect on aggregate consumption,
addressing the empirical evidence of the permanent income hypothesis deviations (CAMP-
BELL; MANKIW, 1989) due liquidity constrain. Another important difference between
the two household types is their vulnerability to the Covid-19 impacts, being that the
Ricardian households have more access to home based job positions (DINGEL; NEIMAN,
2020) and lower likelihood to have commorbidity factors as diabetes (PIRES; CARVALHO;
XAVIER, 2020) than non-Ricardian agents. Therefore, the fear of its consequences is
greater for the Ricardians, their preferences to provide labor hours is affected, (more
details will be provided latter in this work).
Regarding firms, we distinguish between producers of differentiated intermediate
goods, which face a monopolistic competition, and producers of final goods, facing a perfect
competition environment.
The fiscal authority performs public investments and biased income transfers, and
levies distorting taxation on consumption, labor, and capital accumulation in order to
finance its activities.
The monetary authority follows a simple Taylor rule. The figure 4 depicts the core
relations in the model.
In the following sections, we outline the behavior of the different types of agents,
define the model’s aggregate outcomes, and state the aggregate resource constraint which
needs to be satisfied in equilibrium to clear the model.
3.1 Households
There are two households classified as R and N R. The members of R households are
indexed by r ∈ [0, 1 − ζ]. They have access to financial markets, in which they buy and sell
one period bonds launched by the fiscal authority, and accumulate physical capital, the
services of which they rent out to firms. The aforementioned access enables the members
of R households to smooth their consumption profile in response to shocks. On the other
hand, the members of N R households are indexed by nr ∈ (1 − ζ, 1]. They cannot access
the capital market and, therefore do not smooth their consumption in response to a shock.
Members of both R and N R households supply differentiated labor services and act as
Chapter 3. Model 26
Figure 4 – stilized model
wage setters in monopolistic competitive markets. As a consequence, they must supply

sufficient labor hours to satisfy firms demand.
3.1.1 R households
Each member of R households maximize their lifetime utility function by consuming
(Cr,t ) and investing (ItP )1 , therefore accumulating next period’s physical stock (Kt+1P
)2 .
They also determine the intensity in which the existing capital stock is utilized (Ur,t ) and
the amount of next period’s of government bonds they will hold (Bt+1 ). These definitions
provide the following utility function equation:
∞
(Cr,t − hCr,t−1 )1−σ ν · Θ · L1+ϕ
" #
r,t
max t
(3.1)
X
Et β − ,
P ,U ,I P ,B
Cr,t ,Kt+1 t t t+1 t=0 1−σ 1+ϕ
where β accounts for the discount factor, σ for the risk aversion parameter, and ϕ for
the marginal disutility of work supply. The parameter h measures the degree of external
habit formation in consumption. The parameter ν ∈ (0, 1] measures the exposure and the
related fear of Covid-19’s consequences regarding the impact faced by the non-Ricardian
households. Θ symbolizes the Covid-19 shock, which affects the preferences of work supply
in the utility function. Thus, the utility of r households members depends positively on
the difference between the current level of individual consumption (Cr,t ) and its lagged
1
The sup P in the term is here to differentiate the investments made by private agents from the ones
made by government and the r is omitted, since only Ricardian agents can access private investments
2
Idem
Chapter 3. Model 27
level, and negatively on individual labor supply (Lr,t ), amplified by the Covid Shock (Θ)
defined as :
log Θt = ρΘ log Θt−1 + εΘ,t , (3.2)
R households members face the following period-by-period budget constraint:

Br,t+1
Pt (1 + τtc ) Cr,t + Ir,t
P
+ RtB
= Wr,t Lr,t 1 − τtl + Rt Ur,t Kr,t
P
1 − τtk
h i
P
−Pt Kr,t Ψ1 (Ur,t − 1) + Ψ2
2
(U r,t − 1)2
+ Bt ,
where Pt accounts for the price of a unit of the private consumption, RB for the
risk-less returns on government bonds, Lr,t for the labor services provided to firms at
wage rate (Wr,t ), Rt for the rental rate for the effective capital services rent to firms, and
(Rt Ur,t Kr,t ) for the dividends paid by household-members-owned firms.
Empirical evidence suggest that the intensity in which available capital is used varies
over time. Thus, in the event of a shock, not only would the level of investment be altered
but the level of utilization would also be affected. Following Christiano, Eichenbaum e
Evans (2005) and Smets e Wouters (2003), we introduce this friction defining a cost function
associated with variations in installed capacity. This cost functions is an increasing, convex
function (Ψ0 (Ut ) > 0 and Ψ00 (Ut ) > 0) represented in the Ricardian budget constraint with
h i
the functional form: Ψ1 (Ur,t − 1) + Ψ22 (Ur,t − 1)2 . So the cost associated with capital
h i
allocations is : Pt Kr,t
P
Ψ1 (Ur,t − 1) + Ψ22 (Ur,t − 1)2 . This friction is also important to
understand the limitation of a potential economy output fast recovery after pandemic
phase, due to it.
The fiscal authority absorbs part of the gross income of the R household members
to finance its expenditure. In this context, τtc accounts for the consumption tax rate levied
on consumption; τtL and τtk account for the tax rates levied on the capital accumulation
returns; we assume, for simplicity’s sake, that the utilization cost of physical capital and
physical capital depreciation are exempted from taxation.
The capital stock owned by household member r evolves according to the following
capital accumulation equation:
 !2 
χ ItP
P
Kr,t+1 = (1 − δ)Kr,t
P
+ Ir,t
P 
1− −1 , (3.3)
2 P
It−1
where the δ accounts for the capital depreciation rate. Due to the fact that the
capital stock would not be at its optimal level period-by-period because it can not be
instantaneously built and installed (machinery, buildings, etc), we introduce a friction

of adjustment cost on Investment (S(.) = S It−1It
). The function is defined under the
following conditions : S(1) = 0, S(1) > 0 and S > 0 and is represented by:
0 00
Chapter 3. Model 28
" 2 #
ItP
1− χ
2 P
It−1
−1 ,
indicating that the cost of maintaining a constant level of capital is zero, but is
greater than zero when the intention is to elevate the level of capital. Is is, therefore,
important to understand the potential limitation of potential economy output velocity
recovery after pandemic phase down, slowing down the optimal alocation.
3.1.2 Choice of allocations

Defining as λr,t and Qr,t the Langrange multipliers associated with the Ricardian
budget constraint (3.3) and the capital accumulation equation (3.1.1), respectively, the
first-order conditions for maximizing the households member’s lifetime utility function(3.1)
with respect to Cr,t , Ir,t
P P
, Kr,t+1 , Ur,t and Br,t+1 , are given by :
(Cr,t − hCr,t−1 )−σ (Et Cr,t+1 − hCr,t )−σ

λr,t = − hβ , (3.4)
Pt (1 + τtc ) Pt (1 + τtc )

Qt = βEt (1 − δ)Qt+1 + λr,t+1 rt+1 Ut+1 1 − τt+1
k
Ψ2
" #
− λr,t+1 Pt+1 Ψ1 (Ut+1 − 1) + (Ut+1 − 1)2 , (3.5)
2
1
!
Rt
= [Ψ1 + Ψ2 (Ut − 1)] , (3.6)
Pt 1 − τtk
 !2 !
χ ItP IP ItP
λr,t Pt (1 + τtc ) − Qt 1 − −1 − χ Pt −1 
2 P
It−1 It−1 P
It−1
 !2 !
P P
It+1 It+1
= χβEt Qt+1 − 1 , (3.7)
ItP ItP
λr,t
= βEt λR,t+1 . (3.8)
rtB
3.1.3 Wage Setting

The R household members act as wage setters for their differentiated labor services
(Lr,t ) in monopolistic competitive markets. We assume that the wages for the differentiated
labor services (Lr,t ) are determined by staggered nominal wage contracts à la Calvo
(CALVO, 1983). Thus, household members receive permission to optimally reset their
nominal wage contract in a given period t with probability 1 − θW . All household members
that receive such permission choose the same wage rate WR∗ = Wr,t∗
, whereas members who
do not receive permission are allowed to adjust it according to the following scheme:
Wr,t = Wr,t−1 (3.9)

Chapter 3. Model 29
The members of household R who receive permission to optimally reset their wage
contracts in period t are assumed to maximize lifetime utility, as represented by equation
(3.1), taking into account equation (3.1.3) and the demand for their labor services from
firms (The firm’s problem will be formalized later in this work). Thus, we obtain the
following expression for the optimal wage-setting decision in period t for the firm j:


" ψW #1+ϕ
maxWj,t (βθW ) i Wt+i
P∞
∗ Et
i=0 − ν·Θ Lr,t+i ∗
Wj,t
 1+ϕ
" ψW #)

+λr,t+i ∗
Wj,t Lr,t+i Wt+i
∗
Wj,t
1− l
τt+i
With the following first-order condition for the optimal wage-setting :
 !ψW ϕ !ψW
∞
Wt+i Wt+i 1
(βθW ) {ν · Θ · ψW Lr,t+i
i
X
Et ∗
 Lr,t+i ∗ ∗
i=0 Wj,t Wj,t Wj,t
!ψW 
Wt+i 
+ (1 − ψW ) λr,t+i Lr,t+i ∗
1 − τt+i
l
=0 (3.10)
Wj,t 
This expression states that in those labor markets in which wage contracts are
reoptimised, the latter are set so as to equate the household members’ discounted sum
of expected after-tax marginal revenues, expressed in consumption-based utility terms
(λr,t+i ). Another aspect of this expression is the memory effect of the pandemic shock
which affects the lifetime utility entering in the reoptimed wage contract.
3.1.4 NR households
The members of N R households do not have access to capital and bond markets
and the do not have the possibility to inter-temporally smooth their consumption. Thus,
the members of N R households optimally choose consumption (Cnr,t ), maximizing the
following lifetime utility function :
∞
(Cnr,t − hCnr,t−1 )1−σ ΘL1+ϕ
" #
nr,t
max Et t
(3.11)
X
β − ,
Cnr,t
t=0 1−σ 1+ϕ
subject to the following period-by-period budget constraint:

Pt (1 + τtc ) Cnr,t = Wnr.t Lnr,t 1 − τtl + Pt T Rt (3.12)
Where T Rt is the government income transfer to the non-Ricardian.

Chapter 3. Model 30
Defining as λnr,t the Langrange multipliers associated with the non-Ricardian budget
constrain(3.12), the first-order condition for maximizing the households member’s lifetime
utility function(3.11) with respect to Cnr,t is given by :
(Cnr,t − hCnr,t−1 )−σ (Et Cnr,t+1 − hCnr,t )−σ

λnr,t = − hβ , (3.13)
Pt (1 + τtc ) Pt (1 + τtc )
The members of N R household act wage-setters for their differentiated labor services
in a manner analogous to the behavior of the members of R households. Thus, we obtain a
first-order condition for their optimal wage-setting decision similar to that for the members
of household R.
3.2 Firms
There are two types of firms. A continuum of monopolistic competitive firms indexed
by j ∈ [0, 1], each of which produce a single differentiated intermediate good (Yj,t ). The
final goods sector is represented by a single firm that, using especific, pertinent technology,
aggregates intermediate goods into one single good that will be consumed by the agents.
3.2.1 Intermediate-good Firms

Each intermediate-good firm j produces its differentiated output using a Cobb-
Douglas technology:
Yj,t = At Kj,t
P ηK ηL GηKG
Lj,t Kt (3.14)
Homogeneous capital services (Kj,t

P
) are rented from the members of R households in
fully competitive markets, while homogeneous public capital services are provided by the
government (KtG ), following Carvalho, Valli et al. (2011), according to whom public capital
is introduced as a productivity enhancing factor. It is identical to all firms and require no
counterpart. An index of differentiated labor services (Lj,t ) combines household-specific
varieties of labor supplied in monopolistic competitive markets. The variable At represents
(total-factor) productivity which is assumed to be identical across firms and which evolves
over time according to the process:
log At = (1 − ρA ) log Ass + ρA log At−1 + εt , (3.15)
where Ass determines the steady-state level of productivity.
3.2.2 Capital and Labor Inputs

Taking only the rental cost of capital Rt and the aggregate wage index Wt (to be
derived below) as given, once public capital do not have counterpart in put costs, the
Chapter 3. Model 31
firm’s optimal demand for capital and labor services must solve the following problem :
min Wt Lj,t + Rt Kj,t

P
, (3.16)
Lj,t ,Kj,t
subject to the technology constrain (3.14).

Defining as M Cj,t the Lagrange multiplier associated with the technology constraint,
we have the following first-order conditions :
Yj,t
Lj,t = (1 − ηK )M Cj,t , (3.17)
Wt
Yj,t
Kj,t = ηKP M Cj,t (3.18)
Rt
Since all firms j face the same input prices and since all have the same production
tecnology (M Cj,t = M Ct ), incorporating the public capital we have :
!ηL !ηKP
1 Wt Rt
M Ct = G
. (3.19)
At Kj,t ηKG ηL ηKP
The labor input used by firms J in producing its differentiated output (Lj,t ) is
assumed to be a composite of two household-specific bundles of labor supply (LR j,t and
Lj,t ) which combine the differentiated labor supply of the individual members of the both
NR
households R and N R. According to the following expression :

η
1− 1 1 η−1
1 1
R 1− η

Lj,t = (1 − υw · ζ) η LR
j,t
η
+ υw · ζ η LN
j,t (3.20)
where the parameter η > 1 denotes the intratemporal elasticity of substitution

between the two household-specific bundles of labor supply and υw introduces a bias in
favor of more skilled workers, which is a important element when modeling the pandemic
and its unequal distribution of home based jobs with bias towards the Ricardians (DINGEL;
NEIMAN, 2020).
Defining as Lrj,t and Lnr
j,t the use of the differentiated labor services supplied by
household members r and nr, respectively, we have:
 1  ψψW−1
1
! Z 1−ζ W
ψW 1− 1
LR = r
Nj,t ψW
dr (3.21)
1−ζ

j,t
0
 1  ψψW−1
1
! Z 1 W
ψW 1− 1
j,t =
LN (3.22)
R r ψW
 Nj,t dnr
ζ 1−ζ
where the intratemporal elasticities of substitution between the differentiated labor

supply (ψW ) of the members of households R and N R are equal for simplification, given
that the differentiation is significantly greater inter-households than intra-households. With
nominal wage contracts for differentiated labor supply r and nr being set in monopolistic
Chapter 3. Model 32
competitive markets, firm j takes wages Wr,t and Wnr,t as given and chooses the optimal
input of each labor variety r and nr by minimizing the cost of forming household-specific
labor bundles ( 01−ω Wr,t Lrj,t dr and 1−ω j,t dnr), subject to the aggregation constraints
R1
Wj,t Lnr
R
(3.21) and (3.22). This yields the following demand functions for labor varieties r and nr:
!−ψW
1 Wr,t
Lrj,t = LR (3.23)
1−ζ WR,t j,t
!−ψW
1 Wnr,t
Lnr = LN R
(3.24)
j,t
1−ζ WN R,t j,t
where WR,t and WN R,t are nominal wage indexes given by

! 1
1 Z 1−ζ 1−ψW
WR,t = (Wr,t ) 1−ψW
dr (3.25)
1−ζ 0
1
1Z 1
!
1−ψW
WN R,t = (Wnr,t )1−ψW dnr (3.26)
ζ 1−ζ
Next, taking the wage indexes WR,t and WN R,t as given, the firm chooses the
combination of the household-specific labor bundles LR
j,t and Lj,t that minimise WR,t Lj,t +
NR R
NR
WR,t Nj,t subject to aggregation constraint (3.20). This yields the following demand
functions for the household-specific labor bundles:
−η
WR,t

LR
j,t = (1 − ζ) Lj,t (3.27)
Wt
−η
WN R,t

j,t = ζ
LN (3.28)
R
Lj,t
Wt
where
1
Wt = (1 − υw · ζ) (WR,t )1−η + υw · ζ (WN R,t )1−η 1−η

(3.29)
is the aggregate nominal wage index. Thus, the minimum cost of using the composite
labor Lj,t as an input in producing the differentiated intermediate output Yj,t , given by
Wt Nj,t .
Aggregating across the continuum of intermediate-good firms j, we obtain the
following demand for labor varieties r and nr:
!−ψW
Z 1
1 Wr,t
Lr,t = Lrj,t dj = LR (3.30)
0 1−ζ WR,t t
!−ψW
Z 1
1 Wnr,t
Lnr,t = Lnr
j,t dj = LN
t
R
(3.31)
0 ζ WN R,t
Chapter 3. Model 33
3.2.3 Pricing Setting

Each firm j sells its differentiated output Yj,t under monopolistic competition where
there is sluggish price adjustment due to staggered price contracts à la Calvo (CALVO,
1983). Accordingly, firm j receives permission to optimally reset prices in a given period t
with probability 1 − θ. Following the same structure regarding the salaries, firms that do
not receives permission to optimally reset prices in a given period t will follow the rule:
Pj,t+1 = Pj,t , (3.32)
while intermediate firms that are capable of readjusting their prices respect:
∞
max (βθ)i Pj,t
∗
(3.33)
X
∗
Et Yj,t+i − CTj,t+i ,
Pj,t
i=0
where CTj,t+i = Yj,t+i · M Cj,t+1 . The problem will be solved after the presentation
of final good firm.
3.2.4 Final-Goods firms

In order to produce aggregate final goods, Final-Goods firms utilize goods produced
by intermediate firms, take as given the prices of intermediate good utilized in final good
production, and aggregate them the through Dixit-Stigltz aggregator (DIXIT; STIGLITZ,
1977), following :
! ψ
Z 1 ψ−1 ψ−1
Yt = ψ
Yj,t dj , (3.34)
0
where parameter ψ > 1 measures the elasticity of substitution between intermediate

firm’s good and Pt as the nominal price of the final good.
The problem representative final goods firms have to solve in order to maximize their
profit is:
Z 1
max Pt Yt − Pj,t Yj,t dj (3.35)
Yj,t 0
Solving the Final-Good problem we find the demand function for intermediate good
j:
!ψ
Pt
Yj,t = Yt (3.36)
Pj,t
The demand for intermediate firms’ goods is directly proportional to aggregate
demand (Yt ) and inversely proportional to its relative price level ( PPj,tt ).
Chapter 3. Model 34
Substituting equation (3.36) in equation (3.34), we find the mark-up rule for final
good :
Z 1 1
1−ψ
Pt = 1−ψ
Pj,t dj (3.37)
0
3.3 Aggregating Prices, Consumption and Wages dynamic

After the characterization of final goods firms, it is time to solve the intermediate
firms optimal price and the economy aggregate price. In order to define the price of those
firms capable of readjusting theirs price, we substitute the equation (3.36) in equation
(3.33), coming to the follow equation:
 !ψ !ψ 
∞
Pt+i Pt+i
max (βθ)i Pj,t
∗
(3.38)
X
Et Yt+i ∗
− Yt+i ∗
M Cj,t+i  ,
∗
Pj,t
i=0 Pj,t Pj,t
The first-order condition provides us with:
∞
!
ψ
= ∗
Et (βθ)i M Cj,t+i (3.39)
X
Pj,t
ψ−1 i=0
Note that all intermediate firms that readjust their prices have the same mark-up on
the same marginal cost. Thus the optimal price Pj,t ∗
is the same for all 1 − θ firms that
readjust their prices.
As all intermediate firms are subject to the same level of technology, we can obtain
the aggregate price level for this economy as follows:
Z θ Z 1
Pt1−ψ = 1−ψ
Pt−1 dj + Pt∗1−ψ dj, (3.40)
0 θ
thus the price is :
h i 1
Pt = θPt−1
1−ψ
+ (1 − θ)Pt∗1−ψ 1−ψ
. (3.41)
The aggregate value for consumption is given by the generic form Ht :
Z ζ Z 1
Ht = Hr,j,t dj + Hnr,j,t dj = ζHr,t + (1 − ζ) Hnr,t (3.42)
0 ζ
Thus the aggregate consumption is :
Ct = ζCR,t + (1 − ζ) CN R,t , (3.43)

Resuming to the ideas presented in the past section, that 1 − θW of households
re-optimize theirs wage contracts, the remaining have the same wages as the previous
period, hence the resulting aggregate nominal wages for the Ricardians:
Z θW Z 1
∗1−ψW
1−ψW
WR,t = 1−ψW
WR,t−1 dj + WR,t dj, (3.44)
0 θW
Chapter 3. Model 35
solving we have :
h i 1
∗1−ψW
WR,t = θW WR,t−1
1−ψW
+ (1 − θW ) WR,t 1−ψW
(3.45)
The same dynamic construction is observed for the non-Ricardians.
3.4 Fiscal and Monetary authorities

The fiscal authority purchases the final public consumption good (Gt ), performs
biased transfer payments (T Rt ), issues bonds to refinance its debt (Bt ), and raises taxes
as previously commented. Fiscal authorities’s period-by-period budget constraint then has
the following form:
Bt+1
− Bt + Tt = Pt Gt + Pt ItG + Pt T Rt , (3.46)
RtB
where Tt is given by :

Tt = τtc Pt Ct + ItP + τtl Wt Lt + τtk (Rt − δ) KtP , (3.47)
The public capital stock evolves according to the following capital accumulation
equation:
G
Kt+1 = (1 − δG ) KtG + ItG (3.48)
The government has three fiscal policy instruments on the expenditure side: Gt ; IG ;
and T Rt. On the revenue side, the instruments used are: τtc ; τtl and τtk . All the instruments
follow the same fiscal policy rule:
γz !(1−γZ )φZ

Zt Zt−1 Bt Yss Pss

= StZ , (3.49)
Zss Zss Yt−1 Pt−1 Bss
where Z = Gt , ItG , T Rt , τtc , τtl , τtk
The fiscal shocks are represented by :
log StZ = (1 − ρZ ) log Sss

Z
+ ρZ log St−1
Z
+ εZ,t (3.50)
The monetary authority is assumed to follow a Taylor-type interest-rate rule with

two mandates, namely price stability and economic growth, formally :
!γR " γY #(1−γR )
B
RtB
γπ
Rt−1 πt Yt
B
= B
Stm (3.51)
Rss Rss πss Yss
where Stm is a serially correlated shock, and
log Stm = (1 − ρm ) log Sss

m
+ ρm log St−1
m
+ εm,t , (3.52)
Chapter 3. Model 36
and γY and γπ are the sensitivities of the basic interest rate in relation to the product
and the inflation rate, respectively and γR been the smoothing parameter.
3.5 Market clearing condition

At macroeconomical level, the equilibrium between resources and destinations can
be derived from the budget constraints of individuals (Ricardian and non-Ricardian) and
the government. This requirement generates the following equilibrium condition:
Yt = Ct + ItP + ItG + Gt (3.53)
Equation (3.53) takes into account the fact that accumulate physical capital is
available only to Ricardian individuals. The stock of public capital at period t comes from
investments made by the government (ItG ), which are considered an exogenous variable, as
well as government spending Gt .
37
4 CALIBRATION AND SOLUTION

The model is calibrated to emulate Brazil’s economy before the coronavirus pandemic.
The basic calibration is summarized in table(1).
The calibration of most parameters are extracted from relevant national literature,
especially from the works of Cavalcanti e Vereda (2011) which review both national and
international literature in order to find admissible ranges for the parameters. Different
sources and parameters calibrated to replicate long-term observations are highlighted also
on table (1).
Fiscal parameters are calibrated in order to observe a stationary response of endoge-
nous variables and respect some preferences as :
• From the spending side: government’s spending great responsiveness to primary

deficit, being this response greater than public investments and the latter respon-
siveness greater than income transfers.
• From the revenue side : No diferentiation of taxation responsiveness. In other words,

consumption taxation, labor taxation and capital taxation have the same response
due a primary deficit.
The preferences adopted for the parameters of the spending side capture the flexibility
to maneuver each component considered. The author understands that even with a
significant part of its budget compulsorily directed to payment of pensions and mandatory
expenses (e.g education and health), the Brazilian government is able to allocate its public
spending more flexibly than public investments (e.g roads, hospitals, etc.). These demand
more time for their maturation and cannot oscillate much due to a deficit in the previous
quarter. Therefore, the rationale behind the preference associated with the responsiveness
of income transfers being lower than the other components on the expenditure side involves
a calculation by the public manager who may have a benevolent attitude towards the lack
of income on part of the families (keeping in mind that in our specification there is no bias
in income transfers, but the discussion is still valid). Also, the rationale can be explained
by the positive political dividends resulting from the transfers, given that oscillations are
not well received by the population.
The parameters ρΘ and ν, respectively the autoregresive parameter associated with
the Covid-19 shock and the parameter that measures the exposure and subsequent fear of
Covid-19 consequences, will be focus later in this work and in the Appendix I, respectively.
Chapter 4. Calibration and Solution 38
Parameter Description Value Target/Source
Households and Firms

σ Relative risk aversion coefficient 1 Standard/log utility
ϕ Marginal disutility with regard to supply of labor 1.5 a 1
ηK Elasticity of level of production in relation to private capital 0.33 b

ηL Elasticity of level of production in relation to labor 0.55 b
ηKG Elasticity of level of production in relation to public capital 0.05 b
β Intertemporal discount factor 0.985 interest rate of 6%
δ Private capital depreciation rate 0.025 10% a.a
θ Price stickiness parameter 0.75 a
θW Wage stickiness parameter 0.75 a
ψ Elasticity of substitution among intermediate goods 8 b
ψw Elasticity of substitution between differentiated labor 21 b
η Elasticity of substitution between Ricardian and non-Ricardian labor 3 skilled workers bias
υw bias in favor of more skilled workers 0.003 d2
c
τss Rate of tax on consumption in steady state 0.16 b 3
l
τss Rate of tax on income from labor in steady state 0.17 b
k
τss Rate of tax on income from capital in steady state 0.08 b
ζ Proportion of ricardian agents in population 0.6 PNAD Covid 4
h Habit persistence 0.65 a

x Sensitivity of investments in relation to adjustment cost 2.3 b
1
Ψ1 Sensitivity of cost of under-utilization maximum installed capacity 1 β − (1 − δ) b
Ψ2 Sensitivity of cost of under-utilization maximum installed capacity 2 1 b
δG Depreciation rate of public capital 0.025 10% a.a
Taylor rule parameters
γR Interest rate persistence 0.79 a
γY Sensitivity of interest rate in relation to output 0.16 a
γπ Sensitivity of interest rate in relation to inflation 2.5 a
Fiscal parameters
φT Rss Proportion of transfers in relation to output on steady state 0.015 PBF 5
φBss Proportion of public debt in relation to output on steady state 0.8 80% (Y / GDP)
φIss Proportion of public investment in relation to output 0.02 d 6
G
γG Public spending persistence 0.4 c 7
1
(CAVALCANTI; VEREDA, 2011)
2
(CARVALHO; VALLI et al., 2011)
3
(JUNIOR, 2016)
4
Proportion of households that did receive Emergencial aid
5
Bolsa Familia Program
6
(CAVALCANTI et al., 2018)
7
Stationarity of the model and pecking order debated on calibration text.
γI G Persistence of public investment 0.4 c

γT R Persistence of income transfer 0.4 c
γτc Persistence of tax on consumption 0.55 c
γτl Persistence of tax on labor income 0.55 c
γτk Persistence of tax on capital income 0.55 c
φG Public spending response due public primary deficit -0.9 c
φI G Public investment response due public primary deficit -0.6 c
φT R Income transfer response due public primary deficit -0.3 c
φcτ Tax on consumption due public primary deficit 0.7 c
φlτ Tax on labor income due public primary deficit 0.7 c
φkτ Tax on capital income due public primary deficit 0.7 c
Table 1 – Summary of the calibration
4.1 Modeling a Pandemic

After detailing the agents’ behaviors and its standard calibration, we will move
forward in order to describe how the pandemic was treated in this work aiming in order to
expose and properly analyze the core of this study: The distributive and subsequent well
being effect of public income transfer policies during the Covid-19 pandemic.
It was unclear, at first, how to model a pandemic in an standard DSGE model, even
though it seems to be accepted that a highly contagious disease results in a reduction
in economic activity. Social distancing, isolation, and lockdown policies lead to a sharp
reduction in hours labored and, consequently, in economic activity. Notwithstanding, how
to produce this effects is a matter great importance to the modeling process, especially
considering the fact that the pandemic is still happening and all its effects are not well
known yet, what could lead one to misleading conclusions.
The shock presented in this work is considered to be caused exclusively by the
Covid-19 pandemic and affects directly both Ricardian an non-Ricardian agents’ life-time
utility functions (equations (3.1) and 3.11, respectively), hence aggravating the disutility of
work supply8 . Therefore, the shock dynamic is defined by the rational resource allocation
decision of each agent, such as the optimal wage decision (equation (3.10)), which is one
of the main channel through which we consider the pandemic affects the economy. As this
definition happens in each point in time, the pandemic potential effect will be part of the
decision even if its presence is no longer observed, causing the pandemic disturbance to
persist. This assumption is in line with noticeable effects of persistence of greater risk
aversion after big crises events, such as the 2008 financial crises (GUISO, 2012).
8
Appendix J presents a discution about a alternative pandemic modeling specification
The modeling design choice is not an innovation of this work, given that it was
previously introduced to study pandemic macroeconomic effects by Mihailov et al. (2020)
and Baas e Shamsfakhr (2017). The first study the Covid-19 pandemic and the latter,
the spanish-flu pandemic and its influence on male-female workforce participation. The
novelty here is the introduction of heterogeinity of households with different exposure
to the Covid-19 effects, here represented by the parameter ν. The introduction of the
ν parameter aims to account for two important aspects that make the non-Ricardian
household more vulnerable to the disease, fearing more its consequences: (1) The higher
presence of comorbidity factors in the poor population as presented by Pires, Carvalho e
XAVIER (2020), which aggravates the clinical conditions; and (2) their lower ability to
work from home (SALTIEL, 2020),(DELAPORTE; PEÑA, 2020), (DINGEL; NEIMAN,
2020).
The magnitude adopted for ν is equal to 0.5 to represent a middle range of possibilities
due the uncertainty associated with a contemporaneous event modeling and will the focus
of Appendix I, when we present the sensitivity of some selected model’s variables outputs
along with the variation of ν which are critical to model’s behavior.
The author assumes that the Covid-19 pandemic is an exogenous shock, establishing
its intensity as given.
Another simplification is the absence of an explicitly modeling of government invest-
ment in healthcare, mitigation (e.g testing, social distancing measures and mask adoption)
and the exclusion of mortality and its effects on the size of the labor force.
The process of solving the model follows standard techniques been the computational
phase resorted to DYNARE software, which embeds a set of routines developed by
researchers from CEPREMAP (Centre pour la Recherche Economique et ses Applications)
integrated with MATLAB programing.
4.1.1 Size and Duration of Covid Shock

To calibrate the intensity of the shock, the work adopts the observed Brazilian
output decline (-9.7%9 ), compared with the immediately previous quarter (with seasonal
adjustment), of the second quarter of 2020 , when some effects Covid-19 shock can be
accounted, assuming that the previous period the economy was on steady-state, which
is a simplification once Brazil’s economy is experience a profound crises since 2011. The
duration is modeled as a shock that last three quarters, following the figure (5).
9
source IBGE : https://agenciadenoticias.ibge.gov.br/en/agencia-press-room/2185-news-agency/releases-
en/28723-gdp-drops-9-7-in-q2-2020
Figure 5 – One wave Covid shock
4.1.2 First Observations

Following the model and Covid-19’s shock definition, we will in this section compare
the output of the model and the observed data for some endogenous variables. It is
important to note two points here :
1. Even though the real observed data expresses monthly measures, the model is
calibrated to express results in quarters - this option was chosen in face of the small
number of data points.
2. Many public policy measures were taken by the government and each of those
certainly impacts the economic variables dynamic - this option was chosen to isolate
the effect of the Covid Shock (income transfers and its distribution effects will be
the focus of the last chapter).
For a better visualization, as the time window is different between observed data and
model’s results, the figures will be showed one by one, the model’s results will be presented
in black (as in the shock size and duration representation), and the observed data, in blue.
First, figure (6) represents the IBC-br as a proxy for the GDP and figure (7) represents
the models’s Output after the Covid-19 shock, as previously specified. The observed data
begins in February, when the first case was registered in Brazil, but big economies, such
as China and EU community countries, facing a strong effects of the pandemic, also
result a lower Brazilian economic activity. In March, the effects were more pronounced,
since the Covid-19 became a sanitarian challenge, resulting in the worst moment for the
country’s economic index in April. The model was calibrated to starts reflecting this
scenario (begining of QII-2020). As mentioned bafore, the calibration followed the IBGE
quarterly data, reaching a 9.7% decrease in Output.
The dynamics of observed data and the model’s Output are similar, even though
the observed data appears to return to pre-Covid levels sooner than the model suggests.
One possible driver for this fast return are the public policies introduced by governments.
However, we do not have yet the proper historical distancing to accurately analyze the
movements and the differences regarding the frequency, quarterly the model and, monthly
the observed data, would affect the interpretation.
Figure 6 – Observed IBC-br index
Figure 7 – Output dynamics - model- after Covid shock
Figure (8) presents Brasil’s total retail sales index with seasonal adjustment. Data
starts in February, when the first case in Brazil was reported and ends in September,
the last data point. The observed consumption dynamic follows the same trend as the
observed GDP. However, consumption behavior, driven by the fiscal policies, overtake
the pre-pandemic levels. This is a result of the income effect, which affects mainly non-
Ricardian agents, majority of the population who have no access to consumption smooth
mechanics.
Figure (9) presents the consumption dynamic observed on the model for the Ricardian,
non-Ricardian, and aggregate, after only the Covid-19 shock described earlier. Without
active government intervention, consumption’s rates return to their steady state takes much
longer. Moreover, it is important to note the dynamic differences between Ricardians and
non-Ricardians, namely: the first one has, as expected, a smoother decline in consumption
due to the possibility of intertemporal optimization and the second is much more affected
by the shock. The aggregate consumption is more influenced by the non-Ricardian agents,
majority of the population, and have a closer dynamic with the one observed in the real
data, except in intentional suppress of fiscal policies contexts (focused later in this work).
Thus, right after the pandemic shock, aggregate consumption has a quarterly drop of
11.7% according to th model, which is close to the 12.5% observed in the economy 10 .
Figure 8 – Observed retail sales index
Figure 9 – Consumption dynamics for Ricardian, non-Ricardian and aggregate - model-

after Covid shock
10
https://agenciadenoticias.ibge.gov.br/en/agencia-press-room/2185-news-agency/releases-en/28723-
gdp-drops-9-7-in-q2-2020
Sanitarian measures, such as lockdown, social distancing, etc, affected the number of
hours labored on the transformation industry (figure 10). Fiscal policies, like the income
transfers do not accelerate the returns to the steady state as observed on observed GDP
and consumption data.
Figure 11 presents the labor supply dynamics observed for Ricardian, non-Ricardian,
and the aggregate one, after only the Covid-19 shock described earlier. The first half of
the period analysed has a similar behavior to that observed for consumption, although
suffering a greater drop (-16.3%), due to the nature of the shock, which magnifies the
disutility of work. However, the second half presents a faster returns to the steady state,
driven by the steady higher salaries (as discussed bellow).
Figure 10 – Observed labor hour in transformation industry
Figure 11 – Labor supply dynamics for Ricardian, non-Ricardian and aggregate - model-
after Covid shock
Following the same structure adopted for the other economic variables, figure 12
represents Real wages dynamics for registered and non-registered job positions, respectively.
Differently from the other variables, Real wage presents a small increase after the pandemic.
The behavior can be explained by the theory of efficient salaries (STIGLITZ, 1981): As
firms want to retain talents, they tend to pay more than the disutility of the labor supply.
Thus, as non-registered workers could have more access to the public transfers income and
more exposure to the pandemic effects, their disutility cost of labor supply is increased,
leading to the differences from registered and non-registered real earnings observed. A
complementary explanation may be the fact that, in a scenarios of reduction of labor supply
hours, firms are inclined to maintain more skilled workers, not only because they are more
highly regarded and usually have a greater productivity, but also because their positions
usually guarantees them the ability to work from home. Therefore, since considering that
their wages are higher, the average tends to escalate.
Figure 13 presents the model’s aggregate nominal salary dynamics. As described in
the model chapter, salary is an important pandemic shock channel thorough the model. It
is embed with rational expectation resources allocation and considers fear of the pandemic
effects for the agents in the model. For the specification adopted, the salary increases
dramatically after the shock, returning slowly to the steady state. Even though the
counterintuitive aspect of this result, It is similar to the ones found by other works that
adopted the same strategy to model the pandemic in a DSGE framework (MIHAILOV
et al., 2020) and complies with Jordà, Singh e Taylor (2020), which shows that after a
pandemic nominal and real wages grow substantially and for a long period of time. As
the present model does not have changes in population size, the intuition relies on the
substitution of low paid workforce to a more skilled one.
Figure 12 – Observed real earnings registered and non-registered wages

Figure 13 – Wage dynamics - model- after Covid shock

47
5 POLICY EXERCISE
According to the fiscal monitor managed by the International Monetary Fund (IMF),
Brazil was one of the emerging countries that used fiscal resources in response to the
COVID-19 pandemic th most. It is estimated that approximately 8.2% of GDP (BRL582.7
bn) were used in measures such as emergency aid to informal workers, private sector wage
compensation, creation of new lines of credit for small and medium companies, and direct
expenditure to fight the pandemic. In addition to other measures to minimize the economic
and health effects of the pandemic. Such measures influenced the trajectories of economic
variables with forces previously presented when comparing the observed data and the
respective outputs of the model with the inclusion of the COVID shock, representend in
this model as an increase in labor supply disutility, aggravated by the social vulnerability
of part of the population represented by non-Ricardian agents.
Expanding the analysis and seeking to compare different income transfer policy
designs, with differences introduced both in amount and number/structure of installments
executed, we will study their effect on distribution of income among agents belonging
to both Ricardian and non-Ricardian households and their effect in the Output of this
economy.
For the purposes of our analysis, distributional aspects will be understood as the
ratio of Ricardian-non-Ricardian income for each quarter in the study horizon.
Because we are investigating a phenomenon still in progress, some hypothesis about
the development of the pandemic should be adopted. We will specify these hypothesis
together with the description of the exercises performed. However, a valid hypothesis for
all policy exercises is that transfer shocks are unexpected shocks, which contrasts with the
policy initially adopted by the authorities, who communicated the amount and number
of payments in advance. However, there is still uncertainty about how they will act if a
second wave of the pandemic hit the Brazilian economy, bringing the adopted hypothesis
closer to reality for the case of Two-waves pandemic shock.
Thus, the exercise will be conducted as follows:
1. Firstly, a one-wave COVID shock will be applied, described as identical to the shock
used to extract the first observations of the model, which can be seen in the figure
(14). The income transfer strategies studied will be applied starting one period after
the beginning of the shock. The strategies will be discussed right after and the policy
designs are consolidated in table (2). The dynamics of the Output is represented on
figure 16, the response in the income distribution is represented by the figure (17)
and, its impact on the ratio debt-to-Output over the 80% is represented in figure 18.
2. Secondly, a two-waves COVID shock will be applied, being that the first wave will
occur in a similar manner to the on in the previous exercise and the second will
Chapter 5. Policy exercise 48
happen between the end of the third quarter and beginning of the fourth quarter of
2020, but with intensity equal to half that observed in the first wave (Figure 15).
The income transfer policies will be considered to be implemented one period after
the identification of each wave (tables 3 and 4), being that the first just reflects
the strategies adopted in the one-wave shock scenario, while the second introduces
different strategies, with theirs consequences on the Output, income distribution,
and debt-to-Output over the 80% dynamics represented by figures 19, 22, 20, 23, 21,
and 24, respectively.
Figure 14 – One wave Covid shock
Note about the Brazilian government’s measures adopted as reference for

this study and the senarios studied. In this study we will focus on three measures
adopted by the Brazilian govern that work as income transfers policies, which sum up to
R$433.6 billion, namely:
• R$ 321.8 in Auxílio Financeiro Emergencial (Emergency Financial Aid): R$ 600,00

paid monthly for 5 months) 1 .
• R$ 60.2 billion in Extensão do Auxílio Emergencial (Emergency Financial Aid

extension): R$ 300,00 paid monthly for 4 months - 2 .
• R$ 51.6 billion in Benefício Emergencial de Manutenção do Emprego e da Renda

(Emergency Employment and Income Maintenance Benefit) 3 .
1
MPV 937, 956, 970, 988; Lei 13.982 , MP 999, 1000. billion - from https://www.gov.br/economia/pt-
br/centrais-de-conteudo/apresentacoes/2020/novembro
2
MPV 978; Lei Complementar 173 - from idem.
3
MPV 935; Lei 14.020 from Idem
Here we provide a summary4 :
1. Auxílio Financeiro Emergencial and its extension - the government approved

a R$ 600 transfer for the first 5 months after the pandemic shock (from April/20
to August/20) and a 4-month-extension of half of the previous value (R$ 300) to
informal sector workers or unemployed members of low-income families over 18-
years-old and non-eligible for other social benefits (except those already enrolled
in Progama Bolsa Família, which benefit’s were increased to the same amount of
Auxílio Financeiro Emergencial). Single mothers could apply for the double of the
amount transfered (R$ 1200). The total amount transfered was R$373.4 billion.
2. Benefício Emergencial de Manutenção do Emprego e da Renda - the gov-

ernment authorized the reduction of working hours and wages, in return for the
maintenance of jobs, hence paying workers to offset the hours cut while keeping the
workload short. The total amount transferred was R$ 51.6 billion
Figure 15 – Two waves Covid shock
Scenarios. For income transfers, four scenarios will be studied5 : (1) a Laissez-faire
approach from the government, i.e. no transfer, as the base case, observing the Output,
income distribution and ratio debt-to-Output over 80% dynamic - SC1; (2) a proxy of the
strategy adopted by the component Economic Impact Payments (EIP) of Coronavirus
Aid, Relief, and Economic Security (CARES) Act from US government, which is one-time
stimulus payment with the total amount transferred by the Brazilian government (R$ 433.6
billion) - SC2; (3) a proxy of the Auxílio Financeiro Emergencial and its extension strategy,
4
The aid was approved by congress on April 16
5
As the installments are not occuring at the same moment as in the reality, some discrepancies are
expected. For instance we should expected the QIII20 policy result should be visible only in QIV20
paying three installments being the third one the half of the amount of the previous ones -
SC3; and (4) three installments of the same amount as the two first installments of the
previous scenario (SC3), representing a increase of 20% in the total amount transferred
- this scenario aims to replicate the debate occurred in the Brazilian parliament at the
moment when the extension of aid was to be defined.
Comments when a two-waves pandemic shock hit the economy and the
Government actively responds to it. In the two-waves shock scenario, this study will
analyze two alternatives: (1) preservation of the same strategies applied in the one-wave
shock scenario - SC1; and (2) an increase in the amount transferred - SC2. The additional
values will be: for SC2, a additional installment represented by an increase in 20% as to
the previous; for SC3, a one-period extension of the last installment, also represented by
an increase in 20% of the total amount transferred, and for SC4 will an installment of the
half the value of the previous installment will be added, representing an increase in 16.7%
of the total amount transfered.
All scenarios are consolidated in the tables 2, 3 and 4.
Scenarios Amount Installments
SC1 No transfer 0
SC2 R$ 433.6 billion 1 - (QIII20(100%))
SC3 R$ 433.6 billion 3 - (QIII20(40%), QIV20(40%),QI21(20%))
Table 2 – Income transfers strategy scenarios - one-wave
SC1 No transfer 0
SC2 R$ 433.6 billion 1 - (QIII20(100%))
Table 3 – Income transfers strategy scenarios - 1 - two-
wave
SC1 No transfer 0
SC2 R$ 520.3 billion 2 - (QIII20(83%)),QI21(17%))
SC3 R$ 520.3 billion 4 - (QIII20(33%), QIV20(33%),QI21(17%), QII21(17%))
SC4 R$ 607 billion 4 - (QIII20(28.6%), QIV20(28.6%),QI21(28.6%), QII21(14.2%))
Table 4 – Income transfers strategy scenarios - 2 - two-

waves - specific policy
Figure 16 – Output response due income transfers policy after one wave Covid shock
comments of the results

The Ricardian-to-non-Ricardian income ratio progression is consolidated in figures
17 , 20 and 23. They were built for both one-wave and two-wave COVID shock situations,
considering different transfer policies scenarios, as shown in tables 2,3 and 4. In all cases,
the increasing social inequality crisis caused by the pandemics is evident in the QII20
period. It’s important, for comparison’s sake, to draw attention to the fact that, in a
no-transfer policy scenario, the crisis’ duration is of 4 quarters (from QII20 to QI21), after
a one-wave shock, and of 5 quarters (from QII20 to QII21), after a two-wave shock.
The asymmetry of the shock is due to the fact that the pandemic affects Ricardian
and non-Ricardian agents in a different manner. That is, while there is firm preference
towards skilled workers – Ricardians, there is a greater labor supply reduction for those
more vulnerable to the disease (PIRES; CARVALHO; XAVIER, 2020) and with less ability
to work from home (SALTIEL, 2020) – non-Ricardians. This is evidenced by their nominal
wages, given their opposite nature under the COVID shock: positive for the first and
Figure 17 – Income distribution response due income transfers policy after one wave Covid
shock
negative for the latter, which is presented by the policy’s function observed response
(Appendix C).
Considering the base case (i.e. no-transfer-policy scenario), with the recovery of
economic activity, income disparity tends to decrease until a certain point (QI21 for the
one-shock scenario and QII21 for the two-shock), when there is a reversal. Non-Ricardians,
then, recover their wages, but even by the end of the study’s horizon there inequality is
still evident (accumulated area below the graph). The economic channel through which
the restoration happens is the fast employment recovery speed (Appendix D panel L).
Such recovery also presents a demand aspect, what with consumption’s evident increase
for non-Ricardians (Appendix D panel K). Figure 16 compares the base case with SC2,
evidencing how the Output’s curve, from QIV20, begins to have a more accentuated
steepness for the first than for the latter. Besides, the curves intersect between QI21
and QII21, next to the point when the income distribution on base case becomes more
equanimous than on SC2. Similar results are found for curves SC3 and SC4, that is, close
to the point where Output curves for the base case and the aforementioned scenarios
intercept, we find a better distributive effect for the Laissez-faire approach.
It is imperative to reinforce that non-Ricardians present a greater income response to
Output in the previous quarter than Ricardians (0.07 vs 0.04 – policy function - Appendix
C). This result may be explained by the Ricardian agents’ possibility to intertemporally
optimize their utility function with access to mechanisms such as the capital retail interest
Figure 18 – Public Debt/ Output response due income transfers policy after a one-wave
Covid shock
rate and government bonds returns. These abilities guarantees them smoother income
oscilation to shocks, which leads weaker Output sensibility. Output’s distributive effects on
both demand and supply must be considered when studying the impact of income transfer
policies, as limitations on Output growth represent barriers for a more equanimous income
distribution 6 . Therefore, we shall evaluate the model’s dynamics for each of the transfer
policies designs in both one-wave and two-waves shock scenarios.
For the one wave shock, we notice Output has already suffered a -9.7% decrease by
QII20, when transfer policies are executed (or not), according to the scenario. For the base
case (no transfer), we see a slow and gradual economic recovery (-0.2% by QII22), which
happens slightly faster in the first four quarters due to repressed demand. SC2 curve, as for
the base case, presents a gradual recover. However, due to it’s transfer policy design, and
especially during it’s execution, we may observe a 4.8% Output growth when comparing
QII20 and QIII20 (it was of 2.7% for the base case). Such growth is a consequence of the
consumption impulse caused by the ones receiving the transfers (non-Ricardians). After the
period of it’s execution, we begin to notice a reduction in the steepness of the curve, leading
to the intersection between SC2 and base case by QII21. At the end of the study period,
6
It is important to recognize the analysis’s limitations, which are inherent to the modelling strategies:
the number of agents is constant (there are no deaths); there is a bias toward more skilled workers
(Ricardian) with no friction related to the sectors where they work and presenting economic recovery
Immediately after the reduction of pandemic effects
Figure 19 – Output response due income transfers policy after two-wave Covid shock
SC2 curve, ceteris paribus is 0.6% below the steady state Output. SC3 curve presents
a sustained Output growth from QII20, during the transfer policy execution, reaching
8% by QI21, when the transfers end. In this scenario, the growth is also a consequence
of non-Ricardians consumption. The intersection of curves from the base case and SC3
happens in QII21 reaching the end of study’s period 0.7% below of the steady state. As
for SC4 curve, similarly to SC3, presents a sustained Output growth of 8.4% from QII20
until QI21, also greatly driven by non-Ricardians consumption. From this point on, the
growth is stifled, reaching the end of the period 0.8% bellow the Output’s equilibrium.
Likewise, the distributive effect of the transfer policies studied is positive during
their execution. SC2 active a distributive result 1.7% and 0.5% better than the base case
scenario in QIII20 and QIV20. SC3 0.7%,0.9% e 0.4% in QIII20, QIV20 e QI21 and,
SC4 0.7%,0.9% e 0.7% in QIII20, QIV20 and QI21. However, this is no longer the case
after those quarters, occurring a reversion of the state observed. Not coincidentally, this
reversion occurs close to the peaks of the debt-to-Output ratio (QIV20 (SC2), QI21 (SC3
e SC4)) presented on figure 18, that reaches respectively 86.8% for Sc2, 86.4% for SC3
and 86.9% para SC4.
Fiscal tightening resulting from the increased indebtedness intensifies income in-
equality, by diminishing the income transfers positive effects, through three channels: (i)
Figure 20 – Income distribution response to income transfer policies after two-waves Covid
shock
Indebtedness may be translated in income by the Ricardian, as opposed to non-Ricardians

Ricardians have access to one-period Government bonds, while non-Ricardians do not; (ii)
Fiscal tightening reduces Government budgets for both public investment and consump-
tion (Panel A and C - Appendix D), which negatively impacts Output and, consequently,
income ratio; (iii) Increasing indebtedness causes the monetary authority to elevate interest
rates (monetary transmission), reducing private investment (Panel I - Appendix D) and,
consequently, Output 7 .8 . Furthermore, other forces influence the monetary authority’s
desicision: agregate age increse, due to workforce substituition (from less skilled to more
skilled and costfuss), elevates production marginal costs, causing price pressure. With
the introduction of the transfer policies, the pressure intensifies, due to non-Ricardian
consumption and higher wages caused by the higher cost of work disutility. This last
consequence tends to dissipate as the effects of the pandemic diminish and a greater
workforce competition takes place (Panel B and L - Appendix D).
Finally, it is necessary to recognize the importance of the transfer policy design,
both in its volume and extent, determining the dynamics in distributive terms: for the
7
The monetary authority acts through a Taylor rule equation 3.51
8
On the Policy function (Appendix C), we may observe a negative debt-to-interest rate ratio due to
the 1-quarter debt lag, which, given the stationary aspect of the model, with respect of the monetary
policy and the fiscal policy(revenue side(taxation) and expenditure side (investments, consumption
and tranfers)), in the period t we expect a debt reduction, creating more space for interest rate cuts.
Figure 21 – Public Debt/ Output response due income transfers policy after two-waves
Covid shock
one-wave shock case, when comparing SC2 against SC3, we verify that a greater number of
installments (SC3 and SC4) in the total amount transferred allowed for sustained growth
non-Ricardian consumption rates (panel K - Appendix D), raising the Output in a moment
when demand was suppressed, following the economic recovery enlarging the positive
effects of income transfer policies. As a result, a lower indebtedness peak is seen in SC3
(86.4% vs 86.8%), even with the same amount of money being injected in both scenarios.
Similar results may be seen for SC4, suggesting that the dilution of resource injection may
have a shock absorbing effect when it comes to debt-to-Output ratio (figure 18).
However, even if resulting in a lower debt-to-Output ratio peak, injection dilution
prolongs it’s high levels in the medium term, which is evident when comparing SC3 and
SC4 with SC2. Thus, as previously mentioned , we find a better position in terms of
distribution for the latter, by the end of the study’s horizon, namely, -0.5% for SC2 against
-0.3% and -0.2% for SC3 and SC4, respectively.
Shifting our attention towards the two-waves case scenarios, we firstly analyze the
scenarios consolidated in Table 3 and afterwards the ones on Table 4.In terms of Output,
just as we observe for income distribution(figures 19 and 20), the second wave generates a
W shaped curve. Keeping in mind the policies consolidated in Table 3, we realize that the
impact of the second shock on Output sets it, by QIV20, to a distance from equilibrium
Figure 22 – Output response due specific income transfers policy after two-wave Covid
shock
Output of-9.2% for the base case, -8.1% for SC2, and -8% for both SC3 and SC4. It is
important to notive that curves SC3 and SC4 do not present as steep a curve as SC2
and base case, which may be attributed to transfer payments. As for SC2, it presents a
steeper drop than the other scenarios, since there are no longer transfer payments being
executed when the second shock hits, while the economy still has costs associated with
the indebtedness from the first shocks (both pandemic and fiscal) by that time. At the
end of the quarter, the distance from equilibrium Output for each scenario is of -0.6% for
base case, 1% for both SC2 and SC3, and 1.1% for SC4.
The comparision between Figures 17 and 20 shows that the impact of a second wave
delays de deceleration of the rise in inequality between Ricardians and non-Ricardians.
This is another example of the income inequality raising role of the COVID-19 pandemic,
as previously mentioned.
Even though mitigating the rise of inequalities, income transfer policies, in the
case of two-waves Covid pandemic, are in a higher inequality level when we contrast
against the observed in figure 17, (for QII21, as example SC2(0.3%) and now (1.1%),
SC3(-0.1%) and now (0.7%) and SC4 (-0.2%) and now (0.6%) ). However, the reboot effect
observed between QIII21 and QI22 no longer takes place. Instead, we observe a descending
curve, even when implementing the same strategies as before. In other words, there is
Figure 23 – Income distribution response due specific income transfers policy after two-
waves Covid shock
an approximation between those scenarios with transfers and base case, which may be
due to the resumption of economic activity after a more intense depression than in the
previous case . Such recuperation, most accelerated in the final quarters of the study’s
horizon, raises work demand (Panel L - Appendix E) and, consequently, non-Ricardian
income, reducing the income GAP between these and Ricardians. On the other hand,
when a specific transfer policy is design to attend to the second wave, we observe a
different Output curve, as shown in Figure 22. Two points are worth mentioning: (i) By
the time of the additional installment, Output’s raise is 0.4% greater in scenarios SC2,
SC3 and SC4, when compared to the base case (no transfer); (ii) By the end of the study’s
horizon, SC2, SC3 and SC4 are 1.1%, 1.1%, and 1.2% distant from equilibrium Output,
respectively. In addition to that, we again detect the aforementioned three Output growth
potential reducing mechanisms resulting from the pressures generated by the raise in
debt-to-Output ratio, in this case a peak of 89.1% for SC2, 88.7% for SC3 and 89.2%
for SC4 : (i) Indebtedness may be translated in income by the Ricardian, as opposed to
non-Ricardians once Ricardians have access to Government bonds, while non-Ricardians
do not; (ii) Fiscal tightening reduces Government budgets for both public investment and
consumption, which negatively impacts Output and, consequently, income ratio (Panel
A and C - Appendix F); (iii) Increasing indebtedness causes the monetary authority to
elevate interest rates (monetary transmission), reducing private investment (Panel I -
Figure 24 – Public Debt/ Output response due specific income transfers policy after two-
waves Covid shock
Appendix F)) and, consequently, Output . Therefore, the adoption of measures synthesised
in Table 4 lead to a less significant Output recovery and a greater gap between incomes
than the ones observed in the second case (Table 3).
60
6 CONCLUSION
The COVID-19 pandemic posed unprecedented challenges for Governments world-
wide, triggering not only a public health crisis, but also an economic one. Authorities found
themselves juggling with both the direct and indirect consequences of the disease caused
by the SARS-CoV-2 virus, namely the condition itself (COVID-19) and it’s economic
implications. Since there is yet no treatment proved effective to treat it, the only powerful
tools we had were spreading control measures, such as hand washing, mask wearing,
social distancing, border control, and lockdowns (GREENSTONE; NIGAM, 2020),(CHER-
NOZHUKOV; KASAHA; SCHRIMPF, 2020),(GOTTLIEB et al., 2020). However, except
for the couple first, these kinds of policies are greatly harmful for the economy, what with
people losing their jobs, not traveling, not eating out, etc. Government’s greatest challenge
was how to mitigate both effects of the pandemic simultaneously and promptly.
Additionally, it came to light that the people most affected by the direct and
indirect effects of the pandemic are the same - those more economically vulnerable are
the ones not only with higher probability to be infected, but also who have greatest
chances of getting sicker and with less access to public health. That’s because they tend
to live in neighborhoods with high population density, use public transportation, have
no ability to work from home ((SALTIEL, 2020), (DELAPORTE; PEÑA, 2020), and
(DINGEL; NEIMAN, 2020)), and are more frequently affected by comorbidities ((PIRES;
CARVALHO; XAVIER, 2020)). This difference in vulnerability is expressed in this work
by the classification of families in two groups according to their economic vulnerability:
(i)Ricardians: those with access to the capital market and, therefore, to o intertemporal
optimization (less vulnerable); and (ii)non-Ricardians: those who cannot access the capital
market and, therefore, do not smooth their consumption in response to a shock (vulnerable).
In all cases studied, the pandemic increased income inequality between Ricardians and
non-Ricardians and it’s expansion still remains after 4 quarters (from QII20 to QI21), after
a one-wave pandemic shock, and 5 quarters (from QII20 to QII21), after a two-wave shock.
Thus, associated with monetary activism, which is evidenced by interest rates at
historical minimum levels, fiscal activism was configured as a fundamental tool to minimize
the harmful effects resulting from the crisis. Therefore, aiming to mitigate the sharp fall in
consumption levels, Countries have put in place different kinds of transfer policies in order
to deal with the fact that many have been loosing their jobs on account of the pandemic.
Furthermore, the intention of this kind of policy focused on the most vulnerable, providing
these families with enough income to guarantee their survival, is to smooth the asymmetry
of the shock produced by the COVID-19 pandemic. This is the case in this work, which
studied the policy implemented in Brasil:
• Auxílio Financeiro Emergencial and its extension - the government approved

a R$ 600 transfer for the first 5 months after the pandemic shock (from April/20
Chapter 6. Conclusion 61
to August/20) and a 4-month-extension of half of the previous value (R$ 300) to

informal sector workers or unemployed members of low-income families over 18-
years-old and non-eligible for other social benefits (except those already enrolled
in Progama Bolsa Família, which benefit’s were increased to the same amount of
Auxílio Financeiro Emergencial). Single mothers could apply for the double of the
amount transfered (R$ 1200);
• Benefício Emergencial de Manutenção do Emprego e da Renda - the gov-

ernment authorized the reduction of working hours and wages, in return for the
maintenance of jobs, hence paying workers to offset the hours cut while keeping the
workload short.
A two agents DSGE model, calibrated for the Brazilian economy, was developed to
study the effects of the pandemic shock. It was built in such a way that, considering the
pandemic as an exogenous phenomenon, there would be an increase in labor disutility. Also,
a parameter of vulnerability to the effects of COVID-19 and for a more skilled workers
bias was introduced, hence the asymmetry between Ricardians and non-Ricardians the
model assumes. When comparing the data observed between February and August with
the outputs produced by the model disturbed exclusively by the shock of COVID, it is
evident that the measures adopted by the authorities produced changes in the dynamics
of variables, such as Output and aggregate consumption, the latter being found at levels
higher than before the pandemic.
The work extends the analysis seeking to understand how the design of income
transfer policies affects the distribution of income among agents and their counterpart in
product. It was concluded that the design does matter, both in its volume and extent. In
other words, not only the amount transferred, but also the duration of the installments
influence the dynamics in distributive terms. For instance: when the payments are carried
out in a more diluted manner over time, they seem to be more effective during its execution:
(i) for the one-wave shock scenario, we observe a more sustainable consumption growth
along with a lower debt-to-Output ratio; and (ii) for the two-wave shock scenario, we
observe a buffer effect on it’s harmful effects.
However, in the long term, the increase of debt-to-Output ratio due to a fiscal policy
is critical to understand the effectiveness of the policy. Fiscal tightening resulting from
the increased indebtedness intensifies income inequality, by diminishing the transfers’
positive effects, through three channels: (i) Indebtedness may be translated in income
by the Ricardian, as opposed to non-Ricardians, since those have access to one-period
Government bonds; (ii) Fiscal tightening reduces Government budgets for both public
investment and consumption, which negatively impacts Output and, consequently, income
ratio; (iii) Increasing indebtedness causes the monetary authority to elevate interest rates
(monetary transmission), reducing private investment and, consequently, Output. These
Chapter 6. Conclusion 62
results made the necessity of structural reforms in Brazilian economy clear, since the
costs resulting from the transfers will make it difficult to raise the product back to its
equilibrium state, thus requiring alternative ways of creating greater productivity or
reducing production costs.
In conclusion, even with limitations and "shortcuts", the model hereby developed
can be understood as an important instrument for comprehending the current situation,
the potential economic developments of the pandemic, and all the uncertainties associated
with this moment. Transfer policies have show to be a powerful weapon against the side
effects of the much necessary spreading control measures, but, in order to determine how
to deal with it’s long term effects, further research, for instance, the impact of different
economic reform approaches, is needed.
63
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68
APPENDIX A – MORE ON THE COVID RELATED

LITERATURE
Here in this appendiz we will cover the blocks (1) and (2) intentionally omitted in
the main text.
Many authors focused on studying the effects of COVID-19 spreading control mea-
sures. (CHINAZZI et al., 2020) concluded that internal travel restrictions to Wuhan as
of January 23 only ensured a spread delay in China of 3 to 5 days, while international
travel restrictions delayed the spread to the rest of the world until mid-February. Results
also suggest that early detection and isolation of cases, as well as behavioral changes and
awareness of the disease in the population can also help achieving a significant reduction
of transmissibility. (ECKARDT et al., 2020), adopting econometrical techniques such
as PPML and Bayesian INLA, found border control to be vital as a spreading control
measure between European Regions.
(CHERNOZHUKOV; KASAHA; SCHRIMPF, 2020) and (MITZE et al., 2020)
explore the impact of face masks in the spreading of the virus. While the first builds a
counterfactual experiment suggesting that nationally mandating face masks for employees
early in the pandemic could have saved between 19 to 47 thousand lives by the end of May,
the latter consists in a synthetic control method approach which shows that mandating
face masks in Germany reduced daily infection rates by 40%.
(GREENSTONE; NIGAM, 2020) estimated the impact of moderate social distancing
measures in the United States of America, in case they had been adopted by the end of
March, for 3-4 months. The amount of lives saved by the end of October could have been
up to 1.7 million, of which 630 thousand would have been due to avoided overwhelming
of hospital intensive care units. In monetary terms, social distancing could have saved
8 Trillion dollars, of which 90% would have been to over-50 population. (FARBOODI;
JAROSCH; SHIMER, 2020) results also reinforce the importance of moderate social
distancing measures, as opposed to a Laissez-faire policy (When calibrated to this scenario,
the model presents the actual data). However, in objection to these authors, (KRUEGER;
UHLIG; XIE, 2020) point no government intervention, such as mandating hygiene measures,
as optimal.
Moreover, it is important to take cultural matters into account: (PLATTEAU;
VERARDI, 2020) used a standard epidemiological model, age-structured SEIR, to simulate
the effect of different lockdown exit strategies in Belgium, repeating it with data from
Germany and Italy on the date od their lockdown exit. Cultural interaction habits were
found to be of great importance. (LALIOTIS; MINOS, 2020) add a religious factor to the
cultural dimension, using West Germany data to compare predominantly Catholic regions
with stronger social and family ties to non-Catholic ones, which showed the spread and
the resulting deaths per capita to be much higher in the first group.
APPENDIX A. More on the COVID related Literature 69
(GOTTLIEB et al., 2020) measure the effects of social distancing and lockdown
policies on employment and GDP in 57 different countries, ranking them according to the
portion of the population who had the ability to work from home (WFH) and simulating
different lockdown policies. The authors show that, yet “sorely needed”, lockdown policies
effects are greater in poor countries, where average workers have less WFH ability. (ASKI-
TAS; TATSIRAMOS; VERHEYDEN, 2020) develop a multiple-events model to compare
the efficacy between different lockdown policies, varying in type, timing and intensity,
across 135 countries. Their findings evidence the great impact of canceling public events
and enforcing restrictions on gatherings, followed by workplace and school closures as well
as stay-at-home requirements. On the other hand, they suggest that travel restriction
induce no significant reduction in the spreading of COVID-19.
Another important measure to address the spreading of COVID-19 is mass testing,
which requires appropriate measures to optimize scarce resources, such as the test itself.
(PETO et al., 2020) recommend, as a lockdown exit strategy in UK, universal repeated
testing, along with strict household quarantine after a positive, in the whole population of
an entire city as a demonstration site. Professor Paul Romer, in a lecture, suggested that
daily testing of 7% of the population would lead to rapid collapse of the pandemic, with
a transmissibility rate of R=0.75. However, (CLEEVELY et al., 2020) points out some
significant simplifications in the aforementioned work and corrects the value of 7% to 21%,
in order to achieve the desired impact on the transmissibility rate. Besides, they propose
an alternative approach, stratifying the population for testing, instead of randomly doing
it.
As different combating measures were adopted around the world, consumption pattern
shifts were observed. (BAKER et al., 2020), based on data from financial transactions,
analyses how household consumption in the United States of America were impacted by
the pandemics. The results show that all consumption categories studied were severely
affected by COVID-19 and pointed a direct correlation between the changes in consumption
patterns and the severity of the outbreak in the person’s state. They show that spending
increased over 40% in the first half of March (due mainly to an attempt to stockpile
needed home goods and also in anticipation of the inability to patronize retailers) and
declined by approximately 25%–30% in the second half (mainly concentrated in travel,
entertainment, and restaurant spending). Similar results are presented by Andersen et
al. (2020), considering financial transactions in Denmark, showing greater impact on
goods and services whose supply was directly restricted by the shutdown. (COIBION;
GORODNICHENKO; WEBER, 2020) use several waves of a customized survey with more
than 10,000 respondents in the United States of America. They show that about 50%
of survey participants report income and wealth losses due to the COVID-19, with the
average losses being $5,293 and $33,482, respectively.
Besides measuring the effect on the COVID-19 pandemic on the decline in personal
APPENDIX A. More on the COVID related Literature 70
consumption expenditures and individual mobility and the changes in the pattern of con-
sumption expenditures thorought the day and week, (BOUNIE; CAMARA; GALBRAITH,
2020) also elucidate the difference between online and off-line expendituires in France
during the crisis, using individual transaction data available through Cartes Bancaires.
They show that the online shopping channel has attenuated the negative impact of the
disease outbreak on the economy.
71
APPENDIX B – STEADY STATE EQUATIONS

Ass = 1 (B.1)
Uss = 1 (B.2)
Pss = 1 (B.3)
πss = 1 (B.4)
1
B
Rss = (B.5)
β
1 + τss
c
1
! " #
Rss = Pss · · − (1 − δ) (B.6)
1 − τss
k β
ψ−1
!
M Css = · (1 − βθ) · Pss (B.7)
ψ
P
ηKss
1
G ηKG ( ηL )

ηKss
P

ηL
Wss = ηL · ((M Css · ((Kss ) )) · (B.8)
Rss
Wss = WR,ss = WN R,ss (B.9)
ψW − 1 1 − τss
l
" ! !
−σ
A1 = (1 − h · β) (1 − h) (1 − βθW )
ψW 1 + τss
c
" #ϕ # 1 (B.10)
Wss Wss σ
Pss ηL M Css

(Rss − δ) ηKP M Css

l k
Rss Pss − τss ηL M Css − τss
A2 = 
Pss Rss (1 + τss
c )
(B.11)
1
! ! #
δηKP M Css φBs
− − B
− 1 + φT Rss
Rss Pss Rss
σ
A1
σ+ϕ
YSs = (B.12)
A2
Bss = φBss Yss (B.13)
Yss
Lss = ηL · M Css · (B.14)
Wss
Lss = LR,ss = LN R,ss (B.15)

APPENDIX B. Steady state equations 72
Yss
P
Kss = ηKP · M Css · (B.16)
Rss
G
Iss = φIss
G Yss (B.17)
G
Iss
G
Kss = (B.18)
δG
P
Iss = δKss
P
(B.19)
A1
Css = ϕ (B.20)
Yssσ
Gss = Yss − Iss

P G
− Iss − Css (B.21)
T Rss = φT Rss · Yss (B.22)
1
Tss = Pss · (Gss + IGss + T Rss ) − Bss · (( − 1)) (B.23)
RBss
((CRss
−σ
) · (1 − h · β) · (1 − h)−σ )
λR,ss = (B.24)
((1 + τss
c )·P )
ss
((CN Rss
−σ
) · (1 − h · β) · (1 − h)−σ )
λN R,ss = (B.25)
((1 + τss
c )·P )
ss
Qss = λR,ss Pss (1 + τss

c
) (B.26)
Css = CR,ss = CN R,ss (B.27)

73
APPENDIX C – MODEL POLICY FUNCTION

APPENDIX C. Model policy function 74
Here we will present the policy function that was obtained after the model solutions.
APPENDIX C. Model policy function 75
Figure 25 – Model policy function

76
APPENDIX D – SELECTED MODEL OUTPUT

VARIABLES FROM ONE-WAVE COVID SHOCK
APPENDIX D. Selected model output variables from one-wave COVID shock 77
Figure 26 – Selected model output variables from one-wave COVID shock

APPENDIX D. Selected model output variables from one-wave COVID shock 78
Figure 27 – Selected model output variables from one-wave COVID shock

79
APPENDIX E – SELECTED MODEL OUTPUT

VARIABLES FROM TWO-WAVE COVID SHOCK - NO
SPECIFIC POLICY
APPENDIX E. Selected model output variables from two-wave COVID shock - no specific policy 80
Figure 28 – Selected model output variables from two-wave COVID shock - no specific
policy
APPENDIX E. Selected model output variables from two-wave COVID shock - no specific policy 81
Figure 29 – Selected model output variables from two-wave COVID shock - no specific
policy
82
APPENDIX F – SELECTED MODEL OUTPUT

VARIABLES FROM TWO-WAVE COVID SHOCK -
SPECIFIC POLICY
APPENDIX F. Selected model output variables from two-wave COVID shock - specific policy 83
Figure 30 – Selected model output variables from two-wave COVID shock - specific policy
APPENDIX F. Selected model output variables from two-wave COVID shock - specific policy 84
Figure 31 – Selected model output variables from two-wave COVID shock - specific policy
85
APPENDIX G – COVID CASES EVOLUTION AROUND

THE GLOBE
APPENDIX G. Covid cases evolution around the globe 86
Figure 32 – Total cases and deaths in developing countries, Brazil, and world, source:
ECDC.
87
APPENDIX H – ECONOMIC IMPACT - GDP FORECAST

APPENDIX H. Economic impact - GDP forecast 88
Figure 33 – GDP forecast for 2020 and 2021, source : IMF.

89
APPENDIX I – DYNAMIC OF THE MODEL VARYING ν

APPENDIX I. Dynamic of the model varying ν 90
In addition to the size of the Covid-19 shock, the parameters which measure the
difference of vulnerability between Ricardian and non-Ricardian (ν) is crucial to understand
the dynamics of the model. This section will present a sensitivity analysis of how the
variations of this parameter alters the model’s dynamics for selected variables: Output,
Ricardian consumption, non-Ricardian consumption, Ricardian labor offer, non-Ricardian
labor offer and aggregate Wage.
Figure (34) represents the model’s behavior when the parameter ν is set to 0.5,
demonstrating that Ricardians suffer 50% less with the Coivd-19 shock than non-Ricardians
(green curve); on the other hand, when ν is set to 1, the impact of the shock on Ricardians
is equal the that on non-Ricardians (red curve); lastly, when ν is set to 0.3, Ricardian
suffer 70% less with the shock (blue curve).
Output Ricardian C non-Ricardian C Ricardian L Offer non-Ricardian L Offer Wage

0 -0.01 0.05 0.05 0.2 0.6
= 0.5
=1
= 0.3
-0.02
0 0
0
-0.02 0.5
-0.04
-0.05 -0.2
-0.05
-0.06
-0.03 0.4
-0.1 -0.4
-0.08
-0.1
-0.1 -0.04 -0.15 -0.6 0.3
-0.15
-0.12
-0.2 -0.8
-0.05 0.2
-0.14
-0.2
-0.25 -1
-0.16
-0.06 0.1
-0.25
-0.3 -1.2
-0.18
-0.2 -0.07 -0.35 -0.3 -1.4 0

0 5 10 0 5 10 0 5 10 0 5 10 0 5 10 0 5 10
Figure 34 – ν sensitivity
Firstly, it is interesting to note that the value adopted in the model for ν is the
middle range, offering to us a safer option due to the uncertainties associated with the
pandemic modeling. The variations of ν do not represent structural changes, in other
words, the curve have the same trends, with diferences only in magnitudes. When the shock
has the same impact on both Ricardians and non-Ricardians (ν = 1), the Output decrease
almost 19% in the moment of the shock (0), the Output drop observed when ν = 0.5 is
APPENDIX I. Dynamic of the model varying ν 91
9.7% and around 6% when ν = 0.3. As expected, the Labor supply from non-Ricardian
agents decrease more when they suffer closer the same impact suffered by Ricardians
due the scarcity of workforce and the firm’s bias for more skilled workers. However the
non-ricardian labor supply drop when ν = 1 is not realistic.
This sensitivity points to how crucial it is to understand the social diversity of an
economy in order to comprehend the potential developments of shocks of any nature.
92
APPENDIX J – MODELING THE PANDEMIC

ALTERNATIVE SPECIFICATION - DEMAND SHOCK
APPENDIX J. Modeling the pandemic alternative specification - demand shock 93
Alternatively to the supply shock, adopted as the framework for the study and
analysis in the main body text, a Covid shock,Θ, is now associated with a demand shock
is introduced to understand the similiraties and diferences with is supply counterpart. The
shock is build in the same fashion as it was implemented previosly, but now the preferences
affected is associated with consumption. Equation J.1 represents formally this introduction
into the Ricardian utility function. Its formalization is analogous for the non-Ricardians.
∞
ν · Θ · (Cr,t − hCr,t−1 )1−σ L1+ϕ
" #
max t
− r,t (J.1)
X
Et β ,
P ,U ,I P ,B
Cr,t ,Kt+1 t t t+1 t=0 1−σ 1+ϕ
Being all other model’s components equal to the model presented in the main body
text, we reach the following outputs (figures 35 and 36).
Y B RR
0.02 0.02 0
0 0
-0.01
-0.02 -0.02
-0.04 -0.04 -0.02
-0.06 -0.06
5 10 5 10 5 10
RNR IG W
0 0
0.02
-0.02 -0.02
0
-0.04 -0.02 -0.04
5 10 5 10 5 10
G P KP
0.04 0
0.02 0.01
-0.01
0
-0.02 0.005
-0.02
-0.04
-0.06 -0.03 0
5 10 5 10 5 10
Figure 35 – Alternative specification model’s output for selected variables 1
As we can deprehend from the IRFs generated by the model, there are similarities
and differences between the model’s outputs found in the two specifications. Primarily,
on the similarities side, we can see that the product also shows a significant drop due
10-3 RB 10-4 KG
5
0 0
-5 -10
-10
-15 -20
5 10 5 10
CR IP
0.02 0.1
0 0.05
-0.02 0
5 10 5 10
L CNR
0 0
-0.05 -0.05
-0.1 -0.1
5 10 5 10
Figure 36 – Alternative specification model’s output for selected variables 2
to the Covid shock. However its drop,for a shock of the same magnitude, is lower than
the one observed when the shock is applied to the labor supply preferences (5% vs 9.7%),
which is in line with the results found by (BRINCA; DUARTE; CASTRO, 2020) once
also observed that the supply shock, if the results are aggregated, represents two thirds of
pandemic effects on economy Output.
Similarly, the alternative specification shows a decrease in the Government expen-
diture side (public investments and consumption) and a decrease in the labor supply -
important to mention that the drop in labor supply is close to the half of the drop observed
from the supply shock specification (8% vs 16.3%).
On the other hand, the indebteness (B), aggregated salaries (W), Prices (P) and
private investments (IP) present substantial diferences in its evolution over time. In a
demand shock the indebtness elevetates less than 1% in the first quarter and than drops
to almost 6% at the sixth quarter, which differs from the observation extract from the
supply shock where the indebteness is above the steady state for more than ten quarters.
Aggregate salaries drops during and after the Covid shock reaching 4% maximum drop
and stay below the steady state for more than ten quarters contrary to the observation
found in the data (figure 12) and in the literature (JORDÀ; SINGH; TAYLOR, 2020).
The drop in salaries and in the consumption leads a aggregate price drop that reaches a
maximum drop of almost 2.5%. The alternative specification shows an increase of almost
5% in private investments due to the Covid shock which is counterintuitive and potentially
does not represents well the reality once the uncertainty associated with the pandemic
consequences would increase the risk aversion of the investors.
In a gray area, we find consumption variables, CR and CNR - Ricardian consumption
and non-Ricardian consumption, respectively, which, alike the supply shock, presents a
drop of those variables after the covid shock. However, in the alternative specification
it is the Ricardian agents that show a faster resumption of consumption. Result that is
opposed to the observed when the shock is introduced via the supply side. This observed
behavior may represent a weakness of the consumption variables evolution representation
once the data show a more accelerated resumption of consumption by the non-Ricardians,
imposing an erroneous limitation of the income transfer policies focused on these agents.
Based on the previous comments, the author undertands that the supply shock
specification represents better the pandemic and is a more realistic framework to analyze
fiscal policies with intention are mitigate its economic consequences.

Gabriel Pontes

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Insper

Programa de Mestrado Profissional em Economia

Gabriel de Souza Pontes

Distributives and Output effects of income

Distributives and Output effects of income transfer after

Dissertação apresentada ao Programa de

Área de concentração: Economia dos

Linha de pesquisa: Macroeconomia

Supervisor: Juliana Inhasz

Dissertação (Mestrado) – Insper

Distributives and Output effects of income transfer after

Dissertação apresentada ao Programa de

Área de concentração: Economia dos

Linha de pesquisa: Macroeconomia

DATA DE APROVAÇÃO: São Paulo, 18 de janeiro de 2021.

Gino Abraham Olivares Leandro

Vladimir Kuhl Teles

Para Beatriz e Ítalo.

No modelo, tal qual encontrado na literatura, a diferente exposição à doença e o viés

Palavras-chave: Política Fiscal. DSGE. Modelagem novo-keynesiano com dois agentes.

4 CALIBRATION AND SOLUTION . . . . . . . . . . . . . . . . . . . . 37

APPENDIX A – MORE ON THE COVID RELATED LITERATURE 68

APPENDIX B – STEADY STATE EQUATIONS . . . . . . . . . . . . 71

APPENDIX C – MODEL POLICY FUNCTION . . . . . . . . . . . . 73

APPENDIX D – SELECTED MODEL OUTPUT VARIABLES FROM

APPENDIX F – SELECTED MODEL OUTPUT VARIABLES FROM

APPENDIX G – COVID CASES EVOLUTION AROUND THE GLOBE 85

APPENDIX H – ECONOMIC IMPACT - GDP FORECAST . . . . . 87

APPENDIX I – DYNAMIC OF THE MODEL VARYING ν . . . . . 89

APPENDIX J – MODELING THE PANDEMIC ALTERNATIVE SPEC-

Figure 2 – Population proportion of Comorbity factors by level of education, adapted from

Figure 3 – % GDP injected by governments to mitigate COVID pandemic effects, source :

transfer programs to include lower-middle class.

to be carried out in this work.

Figure 4 – stilized model

wage setters in monopolistic competitive markets. As a consequence, they must supply

log Θt = ρΘ log Θt−1 + εΘ,t , (3.2)

R households members face the following period-by-period budget constraint:

3.1.2 Choice of allocations

(Cr,t − hCr,t−1 )−σ (Et Cr,t+1 − hCr,t )−σ

3.1.3 Wage Setting

Wr,t = Wr,t−1 (3.9)

With the following first-order condition for the optimal wage-setting :

Where T Rt is the government income transfer to the non-Ricardian.

(Cnr,t − hCnr,t−1 )−σ (Et Cnr,t+1 − hCnr,t )−σ

3.2.1 Intermediate-good Firms

Homogeneous capital services (Kj,t

log At = (1 − ρA ) log Ass + ρA log At−1 + εt , (3.15)

where Ass determines the steady-state level of productivity.

3.2.2 Capital and Labor Inputs

min Wt Lj,t + Rt Kj,t

subject to the technology constrain (3.14).

households R and N R. According to the following expression :

where the parameter η > 1 denotes the intratemporal elasticity of substitution

where the intratemporal elasticities of substitution between the differentiated labor

where WR,t and WN R,t are nominal wage indexes given by

Wt = (1 − υw · ζ) (WR,t )1−η + υw · ζ (WN R,t )1−η 1−η

3.2.3 Pricing Setting

Pj,t+1 = Pj,t , (3.32)

3.2.4 Final-Goods firms

where parameter ψ > 1 measures the elasticity of substitution between intermediate

3.3 Aggregating Prices, Consumption and Wages dynamic

γz !(1−γZ )φZ