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2006-01: A primer on the macroeconomic effects of an influenza pandemic

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Authors: Steven Kennedy, Jim Thomson and Petar Vujanovic

Interest in pandemics has increased dramatically in recent times with the emergence of Avian Influenza and conditions conducive to a global flu outbreak. While understandably most of the focus is on public health policies that might prevent or ameliorate the effects of a pandemic, there is often reference to the possible economic effects. This paper discusses the pathways through which a pandemic might affect the Australian economy. The Treasury macro econometric model (TRYM) is used to illustrate these pathways. The paper finds that confidence effects and the (large) short term withdrawal of labour are probably the dominant mechanisms through which a pandemic adversely affects the economy. The macroeconomic policy implications flow naturally from these potential economic effects. In particular, policies that restore confidence and consumption, support business in the short term, and promote a quick return to work are likely to be most effective in offsetting the adverse economic consequences of a pandemic.