Global models for a global pandemic: the impact of COVID-19 on small euro area economies

Pablo Garcia Sanchez, Pascal Jacquinot, Črt Lenarčič, Matija Lozej and Kostas(Konstantinos) Mavromatis

No 2603, Working Paper Series from European Central Bank

Abstract: This paper analyses the effects of the COVID-19 pandemic shock on small open economies in a monetary union with an application to the euro area. Accounting for a high degree of openness and a strong dependence on intra and extra union trade, we focus on the size and the direction of international spillovers - both from the shock itself and from the ensuing fiscal response. To do so, we use a unified modelling framework: The Euro Area and the Global Economy (EAGLE) model. Furthermore, within this general framework, we assess the extent to which specific modelling features shape the dynamic responses to the COVID-19 pandemic. The main messages are as follows. First, fiscal spillovers from the rest of the monetary union do matter. Second, the effective lower bound amplifies the size of the spillovers. Third, the design of wage negotiations leads to wage subsidies having negative international fiscal policy spillovers. Fourth, import content of government spending interacts with the effective lower bound, strongly affecting the size and sign of spillovers. Fifth, when households have finite lifetimes, the responses of output and inflation are amplified compared to the case with infinitely lived households. Finally, a next generation EU instrument is more effective when financed using a tax on consumption. JEL Classification: C53, E32, E52, F45

Keywords: COVID-19; DSGE modelling; euro area; international spillovers; monetary union (search for similar items in EconPapers)
Date: 2021-10
New Economics Papers: this item is included in nep-dge, nep-eec, nep-mac and nep-opm
Note: 725400
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Global models for a global pandemic: The impact of COVID-19 on small euro area economies (2023)
Working Paper: Global models for a global pandemic: the impact of COVID-19 on small euro area economies (2023)
Working Paper: Global models for a global pandemic: the impact of COVID-19 on small euro area economies (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20212603

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