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Abstract

This paper investigates the effect of HIV/AIDS on output using an overlapping generations model with heterogeneous agents calibrated to sub-Saharan Africa. Output is found to be below a no-AIDS output in a range between 3% (10%), when only unskilled workers are affected, and 10% (28%), when only skilled workers are affected, whenever the overall infection rate is 7% (20%). When investigating the hypothesis that AIDS affects skilled workers more severely than unskilled at the beginning of the epidemic, with the effect switching as the epidemic becomes more mature, the findings are that the economy can be 8% smaller along the transition path. In all scenarios where the epidemic is temporary, it would take four to five generations or about 90 years for sub-Saharan Africa to recover.