A Counterfactual Economic Analysis of COVID-19 Using a Threshold Augmented Multi-Country Model

43 Pages Posted: 7 Oct 2020

See all articles by Alexander Chudik

Alexander Chudik

Federal Reserve Banks - Federal Reserve Bank of Dallas

Kamiar Mohaddes

University of Cambridge - Judge Business School; University of Cambridge - King's College, Cambridge

M. Hashem Pesaran

University of Southern California - Department of Economics

Mehdi Raissi

International Monetary Fund (IMF) - Fiscal Affairs Department

Alessandro Rebucci

Johns Hopkins University - Carey Business School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 5 versions of this paper

Date Written: 2020

Abstract

This paper develops a threshold-augmented dynamic multi-country model (TG-VAR) to quantify the macroeconomic effects of the Covid-19 pandemic. We show that there exist threshold effects in the relationship between output growth and excess global volatility at individual country levels in a significant majority of advanced economies and several emerging markets. We then estimate a more general multi-country model augmented with these threshold effects as well as long term interest rates, oil prices, exchange rates and equity returns to perform counterfactual analyses. We distinguish common global factors from trade-related spillovers, and identify the Covid-19 shock using GDP growth projection revisions of the IMF in 2020Q1. We account for sample uncertainty by bootstrapping the multi-country model estimated over four decades of quarterly observations. Our results show that, without policy support, the Covid-19 pandemic would cause a significant and long-lasting fall in world output, with outcomes that are quite heterogenous across countries and regions. While the impact on China and other emerging Asian economies are estimated to be less severe, the United Kingdom, and several other advanced economies may experience deeper and longer-lasting effects. Non-Asian emerging markets stand out for their vulnerability. We show that no country is immune to the economic fallout of the pandemic because of global inter-connections as evidenced by the case of Sweden. We also find that long-term interest rates could temporarily fall below their pre-Covid-19 lows in core advanced economies, but this does not seem to be the case in emerging markets.

Keywords: threshold-augmented global VAR (TGVAR), international business cycle, Covid-19, global volatility, threshold effects

JEL Classification: C320, E440, F440

Suggested Citation

Chudik, Alexander and Mohaddes, Kamiar and Pesaran, M. Hashem and Raissi, Mehdi and Rebucci, Alessandro, A Counterfactual Economic Analysis of COVID-19 Using a Threshold Augmented Multi-Country Model (2020). Available at SSRN: https://ssrn.com/abstract=3706605 or http://dx.doi.org/10.2139/ssrn.3706605

Alexander Chudik (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

Kamiar Mohaddes

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom
+44 (0)1223 766933 (Phone)

HOME PAGE: http://https://www.mohaddes.org/

University of Cambridge - King's College, Cambridge ( email )

King's Parade
Cambridge, CB2 1ST
United Kingdom
+44 (0)1223 766933 (Phone)

HOME PAGE: http://https://www.mohaddes.org/

M. Hashem Pesaran

University of Southern California - Department of Economics ( email )

3620 South Vermont Ave. Kaprielian (KAP) Hall 300
Los Angeles, CA 90089
United States

Mehdi Raissi

International Monetary Fund (IMF) - Fiscal Affairs Department ( email )

700 19th Street, NW
Washington, DC 20431
United States

HOME PAGE: http://https://sites.google.com/site/mehdiraissi/

Alessandro Rebucci

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

HOME PAGE: http://carey.jhu.edu/faculty-research/faculty-directory/alessandro-rebucci-phd

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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