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COVID-19 and Emerging Markets: A SIR Model, Demand Shocks and Capital Flows

Cem Çakmaklı (), Selva Demiralp, Sebnem Kalemli-Ozcan (), Sevcan Yesiltas and Muhammed A. Yildirim

No 27191, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We quantify the macroeconomic effects of COVID-19 for a small open economy in the absence of vaccinations. We use a framework that combines a multi-sector SIR model with data on international and inter-sectoral trade to estimate the effects of a joint collapse in domestic and foreign demand. We calibrate our framework to Turkey and estimate the COVID-19 related output losses for each sector. Domestic infection rates feed directly into sectoral demand shocks, where sectoral supply is affected both from sick workers and lockdowns. Sectoral demand shocks additionally capture foreign infection rates through foreign demand. We use real-time credit card purchases to pin down the magnitude of these domestic and foreign demand shocks. Our results show that the optimal policy, which yields the lowest economic cost and saves the maximum number of lives, can be achieved under an early and globally coordinated full lockdown of 39 days, amounting to a loss of 5.8 percent of GDP in the small open economy. To illustrate the importance of foreign demand, we compare the economic costs under globally coordinated vs. uncoordinated lockdown scenarios and incorporate the role of fiscal stimulus packages. Our findings illustrate that the economic drag in the rest of the world due to ineffective lockdown measures increases the economic toll in the small open economy by up to 2 percent of GDP. Meanwhile the stimulus packages abroad, by increasing foreign demand for small open economy’s goods, reduce costs by 0.5 percentage points. We further show that the lack of a similar large fiscal package in the small open economy can be remedied by capital inflows into sectors with large losses.

JEL-codes: E01 F23 F41 (search for similar items in EconPapers)
Date: 2020-05
New Economics Papers: this item is included in nep-ara, nep-cwa, nep-mac and nep-opm
Note: IFM
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