Covid-19 and Emerging Markets: A Sir Model, Demand Shocks and Capital Flows

74 Pages Posted: 18 May 2020 Last revised: 31 Jan 2021

See all articles by Cem Cakmakli

Cem Cakmakli

Koc University - Department of Economics

Selva Demiralp

Koc University - Department of Economics

Ṣebnem Kalemli-Özcan

University of Maryland

Sevcan Yesiltas

Koc University

Muhammed A. Yildirim

Koc University - Department of Economics; Harvard University - Center for International Development (CID)

Date Written: May 2020

Abstract

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.

Suggested Citation

Cakmakli, Cem and Demiralp, Selva and Kalemli-Özcan, Ṣebnem and Yesiltas, Sevcan and Yildirim, Muhammed A., Covid-19 and Emerging Markets: A Sir Model, Demand Shocks and Capital Flows (May 2020). NBER Working Paper No. w27191, Available at SSRN: https://ssrn.com/abstract=3603823

Cem Cakmakli (Contact Author)

Koc University - Department of Economics ( email )

Rumeli Feneri Yolu
Sariyer 80910, Istanbul
Turkey

Selva Demiralp

Koc University - Department of Economics ( email )

Rumeli Feneri Yolu
Sariyer 80910 Istanbul
Turkey
+212 338 1842 (Phone)

Ṣebnem Kalemli-Özcan

University of Maryland ( email )

College Park
College Park, MD 20742
United States

Sevcan Yesiltas

Koc University

Muhammed A. Yildirim

Koc University - Department of Economics ( email )

Rumeli Feneri Yolu
Sariyer 80910, Istanbul
Turkey

Harvard University - Center for International Development (CID) ( email )

One Eliot Street Building
79 JFK Street
Cambridge, MA 02138
United States

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