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COVID-19 and Emerging Markets: An Epidemiological Multi-Sector Model for a Small Open Economy with an Application to Turkey

Cem Çakmaklı, Selva Demiralp, Ṣebnem Kalemli-Özcan, Sevcan Yesiltas, Muhammed A. Yildirim

NBER Working Paper No. 27191
Issued in May 2020
NBER Program(s):International Finance and Macroeconomics

The COVID-19 crisis has the potential to turn into the biggest emerging market (EM) crisis since 1980s. We quantify the macroeconomic effects of COVID-19 for a small open economy by calibrating a SIR-multi-sector-macro model to Turkey. We measure sectoral supply shocks utilizing teleworking and physical job proximity, and sectoral demand shocks with credit card purchases. Both shocks are also affected from changing infection rates under different lockdown scenarios. Our results show that the optimal policy, which yields the lowest economic cost and saves the maximum number of lives, can be achieved under a full lockdown. Being an open economy amplifies the economic costs through two main channels. First, the demand shock has domestic and external components. Second, the initial shock is magnified due to domestic and international input-output linkages. The policy options are limited given the low fiscal space to fight the pandemic and urgent external finance needs to rollover the foreign currency debt. We draw parallels between the policies employed during 2001 crisis in Turkey and discuss pros and cons of policy options to deal with the economic fallout from COVID-19.

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Document Object Identifier (DOI): 10.3386/w27191

 
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