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COVID-19 and Emerging Markets: A SIR Model, Demand Shocks and Capital Flows

Author

Listed:
  • Cem Çakmaklı
  • Selva Demiralp
  • Ṣebnem Kalemli-Özcan
  • Sevcan Yesiltas
  • Muhammed A. Yildirim

Abstract

We quantify the macroeconomic effects of COVID-19 for a small open economy in the absence of vaccinations. We use a framework that combines a multi-sector SIR model with data on international and inter-sectoral trade to estimate the effects of a joint collapse in domestic and foreign demand. We calibrate our framework to Turkey and estimate the COVID-19 related output losses for each sector. Domestic infection rates feed directly into sectoral demand shocks, where sectoral supply is affected both from sick workers and lockdowns. Sectoral demand shocks additionally capture foreign infection rates through foreign demand. We use real-time credit card purchases to pin down the magnitude of these domestic and foreign 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 and globally coordinated full lockdown of 39 days, amounting to a loss of 5.8 percent of GDP in the small open economy. To illustrate the importance of foreign demand, we compare the economic costs under globally coordinated vs. uncoordinated lockdown scenarios and incorporate the role of fiscal stimulus packages. Our findings illustrate that the economic drag in the rest of the world due to ineffective lockdown measures increases the economic toll in the small open economy by up to 2 percent of GDP. Meanwhile the stimulus packages abroad, by increasing foreign demand for small open economy’s goods, reduce costs by 0.5 percentage points. We further show that the lack of a similar large fiscal package in the small open economy can be remedied by capital inflows into sectors with large losses.

Suggested Citation

  • Cem Çakmaklı & Selva Demiralp & Ṣebnem Kalemli-Özcan & Sevcan Yesiltas & Muhammed A. Yildirim, 2020. "COVID-19 and Emerging Markets: A SIR Model, Demand Shocks and Capital Flows," NBER Working Papers 27191, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:27191
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    References listed on IDEAS

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    RePEc Biblio mentions

    As found on the RePEc Biblio, the curated bibliography for Economics:
    1. > Economics of Welfare > Health Economics > Economics of Pandemics > Specific pandemics > Covid-19 > Emerging markets

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    1. Enrique G. Mendoza & Eugenio I. Rojas & Linda L. Tesar & Jing Zhang, 2020. "A Macroeconomic Model of Healthcare Saturation, Inequality and the Output-Pandemia Tradeoff," NBER Working Papers 28247, National Bureau of Economic Research, Inc.
    2. Carlos Alba & Gabriel Cuadra & Juan R. Hernández & Raúl Ibarra-Ramírez, 2021. "Capital Flows to Emerging Economies and Global Risk Aversion during the COVID-19 Pandemic," Working Papers 2021-17, Banco de México.
    3. Domingo Rodríguez Benavides & César Gurrola Ríos & Francisco López Herrera, 2021. "Dependencia de los mercados de valores de Argentina, Brasil y México respecto del estadounidense: Covid19 y otras crisis financieras recientes," Remef - Revista Mexicana de Economía y Finanzas Nueva Época REMEF (The Mexican Journal of Economics and Finance), Instituto Mexicano de Ejecutivos de Finanzas, IMEF, vol. 16(3), pages 1-18, Julio - S.

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    JEL classification:

    • E01 - Macroeconomics and Monetary Economics - - General - - - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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