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Deadly Debt Crises: COVID-19 in Emerging Markets

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  • Cristina Arellano
  • Yan Bai
  • Gabriel Mihalache

Abstract

The COVID-19 epidemic in emerging markets risks a combined health, economic, and debt crisis. We integrate a standard epidemiology model into a sovereign default model and study how default risk impacts the ability of these countries to respond to the epidemic. Lockdown policies are useful for alleviating the health crisis but they carry large economic costs and can generate costly and prolonged debt crises. The possibility of lockdown induced debt crises in turn results in less aggressive lockdowns and a more severe health crisis. We find that the social value of debt relief can be substantial because it can prevent the debt crisis and can save lives.

Suggested Citation

  • Cristina Arellano & Yan Bai & Gabriel Mihalache, 2020. "Deadly Debt Crises: COVID-19 in Emerging Markets," Department of Economics Working Papers 20-07, Stony Brook University, Department of Economics, revised 2021.
  • Handle: RePEc:nys:sunysb:20-07
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    Cited by:

    1. Zaremba, Adam & Kizys, Renatas & Tzouvanas, Panagiotis & Aharon, David Y. & Demir, Ender, 2021. "The quest for multidimensional financial immunity to the COVID-19 pandemic: Evidence from international stock markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 71(C).
    2. Emilio Espino & Julian Kozlowski & Fernando M. Martin & Juan M. Sanchez, 2020. "Domestic Policies and Sovereign Default," Working Papers 2020-017, Federal Reserve Bank of St. Louis, revised 20 May 2021.
    3. Mr. Leonardo Martinez & Juan Carlos Hatchondo & Cesar Sosa Padilla, 2020. "Sovereign Debt Standstills," IMF Working Papers 2020/290, International Monetary Fund.
    4. Ioana-Laura Țibulcă, 2021. "Debt Sustainability: Can EU Member States Use Environmental Taxes to Regain Fiscal Space?," Sustainability, MDPI, Open Access Journal, vol. 13(11), pages 1-15, May.

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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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