IDEAS home Printed from https://ideas.repec.org/p/nys/sunysb/20-07.html
   My bibliography  Save this paper

Deadly Debt Crises: COVID-19 in Emerging Markets

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: https://www.stonybrook.edu/commcms/economics/research/papers/2020/abm_covid_2007.pdf
    File Function: First version, 2020
    Download Restriction: no

    File URL: https://www.stonybrook.edu/commcms/economics/research/papers/2021/ABMSIR_2103.pdf
    File Function: Revised version, 2021
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Viscusi, W. Kip & Masterman, Clayton J., 2017. "Income Elasticities and Global Values of a Statistical Life," Journal of Benefit-Cost Analysis, Cambridge University Press, vol. 8(2), pages 226-250, July.
    2. Aguiar, Mark & Gopinath, Gita, 2006. "Defaultable debt, interest rates and the current account," Journal of International Economics, Elsevier, vol. 69(1), pages 64-83, June.
    3. Finn E. Kydland & Carlos E. J. M. Zarazaga, 2002. "Argentina's Lost Decade," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(1), pages 152-165, January.
    4. V. V. Chari & Rishabh Kirpalani & Christopher Phelan, 2021. "The Hammer and the Scalpel: On the Economics of Indiscriminate versus Targeted Isolation Policies during Pandemics," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 42, pages 1-14, October.
    5. Mark Aguiar & Manuel Amador & Hugo Hopenhayn & Iván Werning, 2019. "Take the Short Route: Equilibrium Default and Debt Maturity," Econometrica, Econometric Society, vol. 87(2), pages 423-462, March.
    6. Hatchondo, Juan Carlos & Martinez, Leonardo, 2009. "Long-duration bonds and sovereign defaults," Journal of International Economics, Elsevier, vol. 79(1), pages 117-125, September.
    7. Maximiliano Dvorkin & Juan M. Sánchez & Horacio Sapriza & Emircan Yurdagul, 2021. "Sovereign Debt Restructurings," American Economic Journal: Macroeconomics, American Economic Association, vol. 13(2), pages 26-77, April.
    8. David Berger & Kyle Herkenhoff & Chengdai Huang & Simon Mongey, 2022. "Testing and Reopening in an SEIR Model," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 43, pages 1-21, January.
    9. Fernando Alvarez & David Argente, 2020. "A Simple Planning Problem for COVID-19 Lockdown," Working Papers 2020-34, Becker Friedman Institute for Research In Economics.
    10. Gottlieb, Charles & Grobovšek, Jan & Poschke, Markus & Saltiel, Fernando, 2021. "Working from home in developing countries," European Economic Review, Elsevier, vol. 133(C).
    11. Satyajit Chatterjee & Burcu Eyigungor, 2012. "Maturity, Indebtedness, and Default Risk," American Economic Review, American Economic Association, vol. 102(6), pages 2674-2699, October.
    12. Glover, Andrew & Heathcote, Jonathan & Krueger, Dirk & Rios-Rull, Jose-Victor, 2020. "Health versus Wealth: On the Distributional Effects of Controlling a Pandemic," CEPR Discussion Papers 14606, C.E.P.R. Discussion Papers.
    13. Robert E. Hall & Charles I. Jones & Peter J. Klenow, 2020. "Trading Off Consumption and COVID-19 Deaths," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 42(1), pages 1-14, June.
    14. Farboodi, Maryam & Jarosch, Gregor & Shimer, Robert, 2021. "Internal and external effects of social distancing in a pandemic," Journal of Economic Theory, Elsevier, vol. 196(C).
    15. Mark Aguiar & Manuel Amador, 2011. "Growth in the Shadow of Expropriation," The Quarterly Journal of Economics, Oxford University Press, vol. 126(2), pages 651-697.
    16. Martin S Eichenbaum & Sergio Rebelo & Mathias Trabandt, 2021. "The Macroeconomics of Epidemics [Economic activity and the spread of viral diseases: Evidence from high frequency data]," Review of Financial Studies, Society for Financial Studies, vol. 34(11), pages 5149-5187.
    17. Raphael Bergoeing & Patrick J. Kehoe & Timothy J. Kehoe & Raimundo Soto, 2002. "A Decade Lost and Found: Mexico and Chile in the 1980s," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(1), pages 166-205, January.
    18. Dingel, Jonathan I. & Neiman, Brent, 2020. "How many jobs can be done at home?," Journal of Public Economics, Elsevier, vol. 189(C).
    19. Daron Acemoglu & Victor Chernozhukov & Iván Werning & Michael D. Whinston, 2021. "Optimal Targeted Lockdowns in a Multigroup SIR Model," American Economic Review: Insights, American Economic Association, vol. 3(4), pages 487-502, December.
    20. Raphael Bergoeing & Patrick J. Kehoe & Timothy J. Kehoe & Raimundo Soto, 2002. "Decades lost and found: Mexico and Chile since 1980," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 26(Win), pages 3-30.
    21. David Berger & Kyle Herkenhoff & Chengdai Huang & Simon Mongey, 2022. "Testing and Reopening in an SEIR Model," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 43, pages 1-21, January.
    22. Cristina Arellano & Gabriel Mihalache & Yan Bai, 2018. "Inflation Targeting with Sovereign Default Risk," 2018 Meeting Papers 851, Society for Economic Dynamics.
    23. Andrew Atkeson, 2020. "What Will Be the Economic Impact of COVID-19 in the US? Rough Estimates of Disease Scenarios," NBER Working Papers 26867, National Bureau of Economic Research, Inc.
    24. Veronica Guerrieri & Guido Lorenzoni & Ludwig Straub & Iván Werning, 2022. "Macroeconomic Implications of COVID-19: Can Negative Supply Shocks Cause Demand Shortages?," American Economic Review, American Economic Association, vol. 112(5), pages 1437-1474, May.
    25. Jeremy Bulow & Kenneth Rogoff, 1988. "The Buyback Boondoggle," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(2), pages 675-704.
    26. Marina Azzimonti-Renzo & Alessandra Fogli & Fabrizio Perri & Mark Ponder, 2020. "Pandemic Control in ECON-EPI Networks," Staff Report 609, Federal Reserve Bank of Minneapolis.
    27. Daron Acemoglu & Victor Chernozhukov & Ivàn Werning & Michael D. Whinston, 2020. "A Multi-Risk SIR Model with Optimally Targeted Lockdown," CeMMAP working papers CWP14/20, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
    28. Xavier Mateos-Planas & Jose-Victor Rios-Rull & Cristina Arellano, 2013. "Partial Default," 2013 Meeting Papers 765, Society for Economic Dynamics.
    29. 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 Sep 2022.
    30. Favero, Carlo A. & Ichino, Andrea & Rustichini, Aldo, 2020. "Restarting the economy while saving lives under Covid-19," CEPR Discussion Papers 14664, C.E.P.R. Discussion Papers.
    31. Hatchondo, Juan Carlos & Martinez, Leonardo & Onder, Yasin Kursat, 2017. "Non-defaultable debt and sovereign risk," Journal of International Economics, Elsevier, vol. 105(C), pages 217-229.
    32. Cristina Arellano & Gabriel Mihalache & Yan Bai, 2018. "Inflation Targeting with Sovereign Default Risk," 2018 Meeting Papers 851, Society for Economic Dynamics.
    33. Cristina Arellano, 2008. "Default Risk and Income Fluctuations in Emerging Economies," American Economic Review, American Economic Association, vol. 98(3), pages 690-712, June.
    34. Andrew Atkeson & Karen Kopecky & Tao Zha, 2020. "Estimating and Forecasting Disease Scenarios for COVID-19 with an SIR Model," NBER Working Papers 27335, National Bureau of Economic Research, Inc.
    35. Maximiliano Dvorkin & Emircan Yurdagul & Horacio Sapriza & Juan Sanchez, 2018. "Sovereign Debt Restructuring: A Dynamic Discrete Choice Approach," 2018 Meeting Papers 1273, Society for Economic Dynamics.
    36. Joël Mossong & Niel Hens & Mark Jit & Philippe Beutels & Kari Auranen & Rafael Mikolajczyk & Marco Massari & Stefania Salmaso & Gianpaolo Scalia Tomba & Jacco Wallinga & Janneke Heijne & Malgorzata Sa, 2008. "Social Contacts and Mixing Patterns Relevant to the Spread of Infectious Diseases," PLOS Medicine, Public Library of Science, vol. 5(3), pages 1-1, March.
    37. Callum Jones & Thomas Philippon & Venky Venkateswaran, 2021. "Optimal Mitigation Policies in a Pandemic: Social Distancing and Working from Home [A simple planning problem for covid-19 lockdown]," Review of Financial Studies, Society for Financial Studies, vol. 34(11), pages 5188-5223.
    38. Juan J. Cruces & Christoph Trebesch, 2013. "Sovereign Defaults: The Price of Haircuts," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(3), pages 85-117, July.
    39. Grey Gordon, 2019. "Efficient Computation with Taste Shocks," Working Paper 19-15, Federal Reserve Bank of Richmond.
    40. 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.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Christian Moser & Pierre Yared, 2022. "Pandemic Lockdown: The Role of Government Commitment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 46, pages 27-50, October.
    2. Marina Azzimonti-Renzo & Alessandra Fogli & Fabrizio Perri & Mark Ponder, 2020. "Pandemic Control in ECON-EPI Networks," Staff Report 609, Federal Reserve Bank of Minneapolis.
    3. V. V. Chari & Rishabh Kirpalani & Christopher Phelan, 2021. "The Hammer and the Scalpel: On the Economics of Indiscriminate versus Targeted Isolation Policies during Pandemics," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 42, pages 1-14, October.
    4. 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.
    5. Abel Brodeur & David Gray & Anik Islam & Suraiya Bhuiyan, 2021. "A literature review of the economics of COVID‐19," Journal of Economic Surveys, Wiley Blackwell, vol. 35(4), pages 1007-1044, September.
    6. Baqaee, David Rezza & Farhi, Emmanuel, 2020. "Supply and Demand in Disaggregated Keynesian Economies with an Application to the Covid-19 Crisis," CEPR Discussion Papers 14743, C.E.P.R. Discussion Papers.
    7. Greg Kaplan & Benjamin Moll & Giovanni L. Violante, 2020. "The Great Lockdown and the Big Stimulus: Tracing the Pandemic Possibility Frontier for the U.S," NBER Working Papers 27794, National Bureau of Economic Research, Inc.
    8. David Baqaee & Emmanuel Farhi, 2020. "Nonlinear Production Networks with an Application to the Covid-19 Crisis," NBER Working Papers 27281, National Bureau of Economic Research, Inc.
    9. Gopal K. Basak & Chandramauli Chakraborty & Pranab Kumar Das, 2021. "Optimal Lockdown Strategy in a Pandemic: An Exploratory Analysis for Covid-19," Papers 2109.02512, arXiv.org.
    10. Dizioli, Allan & Pinheiro, Roberto, 2021. "Information and inequality in the time of a pandemic," Journal of Economic Dynamics and Control, Elsevier, vol. 130(C).
    11. David E. Bloom & Michael Kuhn & Klaus Prettner, 2022. "Modern Infectious Diseases: Macroeconomic Impacts and Policy Responses," Journal of Economic Literature, American Economic Association, vol. 60(1), pages 85-131, March.
    12. Aspri, Andrea & Beretta, Elena & Gandolfi, Alberto & Wasmer, Etienne, 2021. "Mortality containment vs. Economics Opening: Optimal policies in a SEIARD model," Journal of Mathematical Economics, Elsevier, vol. 93(C).
    13. Guillaume Vandenbroucke, 2020. "The Mechanics of Individually- and Socially-Optimal Decisions during an Epidemic," Working Papers 2020-013, Federal Reserve Bank of St. Louis, revised 14 Sep 2021.
    14. Sewon Hur, 2020. "The Distributional Effects of COVID-19 and Optimal Mitigation Policies," Globalization Institute Working Papers 400, Federal Reserve Bank of Dallas, revised 12 May 2022.
    15. Houštecká, Anna & Koh, Dongya & Santaeulàlia-Llopis, Raül, 2021. "Contagion at work: Occupations, industries and human contact," Journal of Public Economics, Elsevier, vol. 200(C).
    16. Daron Acemoglu & Victor Chernozhukov & Iván Werning & Michael D. Whinston, 2021. "Optimal Targeted Lockdowns in a Multigroup SIR Model," American Economic Review: Insights, American Economic Association, vol. 3(4), pages 487-502, December.
    17. Dirk Krueger & Harald Uhlig & Taojun Xie, 2020. "Macroeconomic Dynamics and Reallocation in an Epidemic," PIER Working Paper Archive 20-015, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    18. Yasushi Iwamoto, 2021. "Welfare economics of managing an epidemic: an exposition," The Japanese Economic Review, Springer, vol. 72(4), pages 537-579, October.
    19. Glover, Andrew & Heathcote, Jonathan & Krueger, Dirk, 2022. "Optimal age-Based vaccination and economic mitigation policies for the second phase of the covid-19 pandemic," Journal of Economic Dynamics and Control, Elsevier, vol. 140(C).
    20. Farboodi, Maryam & Jarosch, Gregor & Shimer, Robert, 2021. "Internal and external effects of social distancing in a pandemic," Journal of Economic Theory, Elsevier, vol. 196(C).

    More about this item

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nys:sunysb:20-07. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/edstous.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (email available below). General contact details of provider: https://edirc.repec.org/data/edstous.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.