DP15154 COVID-19 and Emerging Markets: An Epidemiological Model with International Production Networks and Capital Flows

Author(s): Cem Cakmakli, Selva Demiralp, Sebnem Kalemli-Ozcan, Sevcan Yesiltas
Publication Date: August 2020
Programme Areas: International Trade and Regional Economics, International Macroeconomics and Finance, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15154

We quantify the macroeconomic effects of COVID-19 for emerging markets using a SIR-multi-sector-small open economy model and calibrating it to Turkey. Domestic infection rates feed into both sectoral supply and sectoral demand shocks. Sectoral demand shocks also incorporate lower external demand due to foreign infection rates. Infection rates change endogenously with different lockdown policies. To calibrate the model, we use indicators of physical proximity and tele-workability of jobs to measure supply shocks. We use real-time credit card purchases to pin down demand shocks. Our results show that the optimal policy, which yields the lowest eco-nomic cost and saves the maximum number of lives, can be achieved under a full lockdown of 39 days. Partial and/or no lockdowns have higher economic costs as it takes longer to control the disease and hence to normalize the demand. Economic costs are much larger for an open economy because of the amplification role of international input-output linkages. Lower capital flows exacerbate this amplification as capital flows are the key form of financing for the produc-tion network. We document that sectors with stronger international input-output linkages and higher external debt suffer worse COVID losses and as a result have larger fiscal needs.