Deadly Debt Crises: COVID-19 in Emerging Markets

Cristina Arellano, Yan Bai and Gabriel Mihalache

No 27275, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Emerging markets have experienced large human and economic costs from COVID-19, and their tight fiscal space has limited the support extended to their citizens. We study the impact of an epidemic on economic and health outcomes by integrating epidemiological dynamics into a sovereign default model. The sovereign’s option to default tightens fiscal space and results in an epidemic with limited mitigation and depressed consumption. A quantitative analysis of our model accounts well for the dynamics of fatalities, social distancing, consumption, sovereign debt, and spreads in Latin America. We find that because of default risk, the welfare cost of the pandemic is about a third higher than it is in a version of the model with perfect financial markets. We study debt relief programs and find a compelling case for their implementation. These programs deliver large social gains, improving health and economic outcomes for the country at no cost to international lenders or financial institutions.

JEL-codes: E52 F34 F41 (search for similar items in EconPapers)
Date: 2020-05
New Economics Papers: this item is included in nep-mac and nep-ore
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Published as Cristina Arellano & Yan Bai & Gabriel Mihalache, 2024. "Deadly Debt Crises: COVID-19 in Emerging Markets," Review of Economic Studies, vol 91(3), pages 1243-1290.

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Related works:
Journal Article: Deadly Debt Crises: COVID-19 in Emerging Markets (2024)
Working Paper: Deadly Debt Crises: COVID-19 in Emerging Markets (2021)
Working Paper: Deadly Debt Crises: COVID-19 in Emerging Markets (2020)
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