Deadly Debt Crises: Covid-19 in Emerging Markets

46 Pages Posted: 2 Jun 2020 Last revised: 27 Jun 2021

See all articles by Cristina Arellano

Cristina Arellano

Federal Reserve Bank of Minneapolis

Yan Bai

University of Rochester - Department of Economics

Gabriel Mihalache

Stony Brook University

Date Written: May 2020

Abstract

The coronavirus pandemic has severely impacted emerging markets by generating a large death toll, deep recessions, and a wave of sovereign defaults. We study this compound health, economic, and debt crisis and its mitigation by integrating epidemiological dynamics into a sovereign default model. The epidemic leads to an urgent need for social distancing measures, a large drop in economic activity, and a protracted debt crisis. The presence of default risk restricts fiscal space and presents emerging markets with a trade-off between mitigation of the pandemic and fiscal distress. A quantitative analysis of our model accounts well for the dynamics of deaths, social distance measures, and sovereign spreads in Latin America. In the model, the welfare cost of the pandemic is higher because of financial market frictions: about a third of the cost comes from default risk, compared with a version of the model with perfect financial markets. We study debt relief programs through counterfactuals and find a compelling case for their implementation, as they deliver large social gains.

Suggested Citation

Arellano, Cristina and Bai, Yan and Mihalache, Gabriel, Deadly Debt Crises: Covid-19 in Emerging Markets (May 2020). NBER Working Paper No. w27275, Available at SSRN: https://ssrn.com/abstract=3615471

Cristina Arellano (Contact Author)

Federal Reserve Bank of Minneapolis ( email )

90 Hennepin Avenue
Minneapolis, MN 55480
United States

Yan Bai

University of Rochester - Department of Economics ( email )

Harkness Hall
Rochester, NY 14627
United States

Gabriel Mihalache

Stony Brook University ( email )

SBS S633
Stony Brook, NY NY 11794
United States

HOME PAGE: http://www.gmihalache.com/

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