Covid-19 and Emerging Markets: A Sir Model, Demand Shocks and Capital Flows
74 Pages Posted: 18 May 2020 Last revised: 31 Jan 2021
Date Written: May 2020
We quantify the macroeconomic effects of COVID-19 for emerging markets using a frame-work that combines a SIR model with data on international and intersectoral linkages for a small open economy. We use this framework to estimate the sectoral COVID costs for Turkey. Domestic infection rates feed directly into both sectoral supply and sectoral demand shocks. Sectoral demand shocks additionally capture foreign infection rates through external demand. Infection rates at home and abroad can change differentially with different lockdown policies and social distancing measures. We use real-time credit card purchases to pin down the magnitude of these 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 full lockdown of 39 days at the onset of the pandemic. Economic costs are much larger for an open economy because of the low external demand that amplifies the costs through international input-output linkages. We document a strong relationship between sectoral costs of COVID-19 and net capital flows into that sector, implying a tight connection between domestic fiscal space and external finance in emerging markets.
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