Fiscal capacity and commercial bank lending under COVID-19.

We investigate the implications of government indebtedness for the efficacy of expansionary government spending in encouraging commercial bank lending growth during the COVID-19 pandemic. Our sample is a large cross-section of over 3000 banks from 71 countries. To address the likely endogeneity of government assistance, we instrument for extra-normal spending using disparities in pre-existing national political characteristics. Our results indicate that bank lending did respond to fiscal capacity, as higher public debt going into the crisis weakened the expansionary effects of higher spending on bank lending at economically and statistically significant levels. Moreover, this sensitivity was higher among weaker banks, suggesting sensitivity to the perceived implications of spending for government assistance going forward. We also found greater sensitivity in high-income economies and for small and medium-sized banks. Our results are robust to a variety of robustness tests, including perturbations in specification, sample, and estimation methodology.

Fiscal capacity and commercial bank lending under COVID-19

We investigate the implications of government indebtedness for the efficacy of expansionary government spending in encouraging commercial bank lending growth during the COVID-19 pandemic. Our sample is a large cross-section of over 3000 banks from 71 countries. To address the likely endogeneity of government assistance, we instrument for extra-normal spending using disparities in pre-existing national political characteristics. Our results indicate that bank lending did respond to fiscal capacity, as higher public debt going into the crisis weakened the expansionary effects of higher spending on bank lending at economically and statistically significant levels. Moreover, this sensitivity was higher among weaker banks, suggesting sensitivity to the perceived implications of spending for government assistance going forward. We also found greater sensitivity in high-income economies and for small and medium-sized banks. Our results are robust to a variety of robustness tests, including perturbations in specification, sample, and estimation methodology.

Post COVID-19 exit strategies and emerging markets economic challenges.

We study emerging markets' 1980s lost growth decade, triggered by the massive reversal of the snowball effect in the US during 1974-1984, finding that higher flow costs of servicing debt overhang explain the dramatic decline in growth rates of exposed emerging markets. We also show how lowering the US cost of servicing its public debt has been associated with higher US, Japan, and Western Europe real output growth rates during the post WWII recovery decades, 1946-1956, and validate that fiscal adjustments of large countries have strong growth and volatility spillovers effects on exposed emerging markets and developing countries.

Gaps between official and excess Covid-19 mortality measures: The effects of institutional quality and vaccinations.

We evaluate quartile rankings of countries during the Covid-19 pandemic using both official (confirmed) and excess mortality data. By December 2021, the quartile rankings of three-fifths of the countries differ when ranked by excess vs. official mortality. Countries that are 'doing substantially better' in the excess mortality are characterized by higher urban population shares; higher GDP/Capita; and higher scores on institutional and policy variables. We perform two regressions in which the ratio of Cumulative Excess to Official Covid-19 mortalities (E/O ratio) is regressed on covariates. In a narrow study, controlling for GDP/Capita and vaccination rates, by December 2021 the E/O ratio was smaller in countries with higher vaccination rates. In a broad study, adding institutional and policy variables, the E/O ratio was smaller in countries with higher degree of voice and accountability. The arrival of vaccines in 2021 and voice and accountability had a discernible association on the E/O ratio.

Central bank swap arrangements in the COVID-19 crisis.

Facing acute strains in the offshore dollar funding markets during the COVID-19 crisis, the Federal Reserve (Fed) provided US dollar liquidity to the global economy by reactivating or enhancing swap arrangements with other central banks and establishing a new repo facility for financial institutions and monetary authorities (FIMA). This paper assesses motivations for the Fed liquidity lines, and the effects and spillovers of US dollar auctions by central banks using these lines. We find that the access to the Fed liquidity arrangements was driven by the recipient economies' close financial and trade ties with the US. Access to dollar liquidity also reflected global trade exposure. We find that announcements of expansion of Fed liquidity facilities or of auctions using these facilities led to appreciation of partner currencies against the US dollar and reduced these currencies' deviations from covered interest parity (CIP). Dollar auctions by major central banks (BoE, ECB, BoJ and SNB) had spillovers: they led to temporary appreciation of other currencies against the US dollar, reduced CIP deviations, and persistently reduced sovereign bond yields of other economies. However, dollar auctions done by non-major central banks with access to Fed facilities did not have a meaningful impact on key domestic financial variables. The impact of major central bank auctions does not differ by the economies' financial or trade links with the US or their balance sheet currency exposure, i.e. the major central bank auctions benefitted even the more vulnerable economies.

Post COVID-19 Exit Strategies and Emerging Markets Economic Challenges

We outline two divergent exit strategies of the U.S. from the post COVID-19 debt-overhang, and analyze their implications on Emerging Markets and global stability. The first strategy is the U.S. aiming at returning to the 2019, pre-COVID mode of loose fiscal policy and accommodating monetary policy. The short-term benefits of this strategy include faster economic growth as long as the snowball effect – the difference between the interest rate on public debt and the growth rate – is negative. This strategy may entail a growing tail risk of a deeper crisis triggered by a future reversal of the snowball effect, inducing a deeper future sudden stop crises and instability of Emerging Markets. We illustrate this scenario by evaluating Emerging Markets’ lost growth decade during the 1980s, triggered by the massive reversal of the snowball effect in the U.S. during 1974-1984. The second strategy entails a two-pronged approach. First, turning U.S. fiscal priorities from fighting COVID’s medical and economic challenges, towards investment in social, medical and physical infrastructures. Second, with a lag, promoting a gradual fiscal adjustment aiming at reaching overtime primary-surpluses and debt resilience. We illustrate this scenario by reviewing the exit strategy of the U.S. post-WWII, and its repercussions on the ‘Phoenix Emergence’ of Western Europe and Japan from WWII destruction. The contrast between the two exit strategies suggests that the two-pronged approach is akin to an upfront investment in greater long-term global stability. We also empirically show how lowering the cost of serving public debt has been associated with higher real output growth.

The Political Economy of the COVID-19 Fiscal Stimulus Packages of 2020

Almost all countries announced fiscal support programs once COVID-19 hit. However, there was significant diversity in the magnitude and composition of these fiscal stimulus programs. These differences were determined by myriad political, financial, social, and economic factors - these factors are our focus. We ask what were the factors that are associated with the structure of the fiscal programs that governments chose to adopt in the early stage of the pandemic in 2020. We answer this question using details about the fiscal programs that were announced by 98 governments in the first six months of the pandemic, together with a large set of explanatory variables. Maybe not surprisingly, we find that politics played a very significant part in determining the size and composition of these fiscal programs. Governments and societies that are less polarized and more capable were able to mobilise more fiscal resources. We also find that it was governments with bigger debt loads that announced bigger programs, but that sovereign spreads were not so clearly associated with the size of these program plans. There is a limit, however, to what we can glean from these cross-country comparisons. Ultimately, the understanding of the politics and political-economy considerations that led to the specific content of each fiscal program will have to rely on information about the actual deliberations in each government’s halls of power, should these ever become public.

Pandemic Shocks and Fiscal-Monetary Policies in the Eurozone: COVID-19 Dominance During January - June 2020

We compare the importance of market factors against that of COVID-19 dynamics and policy responses in explaining Eurozone sovereign spreads. First, we estimate a multifactor model for changes in credit default swap (CDS) spreads over January 2014 - June 2019. Then, we apply a synthetic control-type procedure to extrapolate model-implied changes in the CDS. The factor model does very well over the rest of 2019 but breaks down during the pandemic, especially during March 2020 when there is a large divergence between the actual and model-implied CDS changes. We find that the March 2020 divergence is well accounted for by COVID-specific risks and associated policies, mortality outcomes, and policy announcements, rather than traditional determinants. Daily CDS widening ceased almost immediately after the ECB announced the PEPP, but the divergence between actual and model-implied changes persisted. This points to COVID-19 Dominance: widening spreads during the pandemic has led to unconventional monetary policies that primarily aim to mitigate short-run fears, temporarily pushing away concerns over fiscal risk.

Good-Bye Original Sin, Hello Risk On-Off, Financial Fragility, and Crises?

We analyze the sovereign bond issuance data of eight major emerging markets (EMs) - Brazil, China, India, Indonesia, Mexico, Russia, South Africa and Turkey from 1970 to 2018. Our analysis suggests that (i) EM local currency bonds tend to be smaller in size, shorter in maturity, or lower in coupon rate than foreign currency bonds;(ii) EMs are more likely to issue local-currency sovereign bonds if their currencies appreciated before the global financial crisis of 2008 (GFC);(iii) inflation-targeting monetary policy increases the likelihood of issuing local-currency debt before GFC but not after;and (iv) EMs that offer higher sovereign yields are more likely to issue local-currency bonds after GFC. Future data will allow us to test and identify structural changes associated with the COVID-19 pandemic and its aftermath.

Emerging Markets Sovereign CDS Spreads During COVID-19: Economics versus Epidemiology News

Can bad news about COVID-19 induce negative expectations on sovereign credit risks? We investigate the factors driving credit default swap (CDS) spreads of emerging market sovereigns around the outbreak of COVID-19. Using 2014-2019 data, we estimate a two-factor model of global and regional risks and then extrapolate the model-implied spreads for the period July 2019–June 2020. Intriguingly, the model initially predicts the realized spreads well but loses predictive accuracy during the COVID-19 pandemic. Fiscal space and oil-revenue dependence primarily drive the differences between the realized and predicted sovereign spreads. Our augmented-factor model indicates that the cumulative COVID-19 mortality rate growth is positively associated with the CDS spreads. The evidence suggests that the epidemiological deterioration can lower confidence in the sovereign credit markets due to the prospects of prolonged lockdowns and a slower GDP growth recovery. Our results also hold for a single regression of daily spread changes during 2014-2020.

Central Bank Swap Arrangements in the COVID-19 Crisis

Facing acute strains in the offshore dollar funding markets during the COVID-19 crisis, the Federal Reserve (Fed) implemented measures to provide US dollar liquidity through swap arrangements with other central banks and establishing a repo facility for financial institutions and monetary authorities (FIMA) in March 2020. This paper assesses motivations for the Fed liquidity lines, and the effects and spillovers of US dollar auctions by central banks. We find that the access to the liquidity arrangements was driven by the recipient economies’ close financial and trade ties with the US. Access to dollar liquidity also reflected global trade exposure. We find that announcements of expansion of Fed liquidity facilities or of auctions using these facilities led to appreciation of partner currencies against the US dollar. and reduced deviations from covered interest parity (CIP). Dollar auctions by major central banks (BoE, ECB, BoJ and SNB) led to temporary appreciation of other currencies against the US dollar, reduced CIP deviations, and persistently reduced sovereign bond yields of other economies. However, dollar auctions done by other central banks with access to Fed facilities did not have a meaningful impact on key domestic financial variables . The impact of major central bank auctions does not differ by the economies’ financial or trade links with the US or their balance sheet currency exposure, i.e. the major central bank auctions benefitted even the more vulnerable economies.

Accounting for Global COVID-19 Diffusion Patterns, January-April 2020

Key factors in modeling a pandemic and guiding policy-making include mortality rates associated with infections;the ability of government policies, medical systems, and society to adapt to the changing dynamics of a pandemic;and institutional and demographic characteristics affecting citizens’ perceptions and behavioral responses to stringent policies. This paper traces the cross-country associations between COVID-19 mortality, policy interventions aimed at limiting social contact, and their interactions with institutional and demographic characteristics. We document that, with a lag, more stringent pandemic policies were associated with lower mortality growth rates. The association between stricter pandemic policies and lower future mortality growth is more pronounced in countries with a greater proportion of the elderly population and urban population, greater democratic freedoms, and larger international travel flows. Countries with greater policy stringency in place prior to the first death realized lower peak mortality rates and exhibited lower durations to the first mortality peak. In contrast, countries with higher initial mobility saw higher peak mortality rates in the first phase of the pandemic, and countries with a larger elderly population, a greater share of employees in vulnerable occupations, and a higher level of democracy took longer to reach their peak mortalities. Our results suggest that policy interventions are effective at slowing the geometric pattern of mortality growth, reducing the peak mortality, and shortening the duration to the first peak. We also shed light on the importance of institutional and demographic characteristics in guiding policy-making for future waves of the pandemic.

Emerging markets sovereign CDS spreads during COVID-19: Economics versus epidemiology news.

Can bad news about COVID-19 induce negative expectations on sovereign credit risks? We investigate the factors driving credit default swap (CDS) spreads of emerging market sovereigns around the outbreak of COVID-19. Using 2014-2019 data, we estimate a two-factor model of global and regional risks and then extrapolate the model-implied spreads for the period July 2019-June 2020. Intriguingly, the model initially predicts the realized spreads well but loses predictive accuracy during the COVID-19 pandemic. Fiscal space and oil-revenue dependence primarily drive the differences between the realized and predicted sovereign spreads. Our augmented-factor model indicates that the cumulative COVID-19 mortality rate growth is positively associated with the CDS spreads. The evidence suggests that the epidemiological deterioration can lower confidence in the sovereign credit markets due to the prospects of prolonged lockdowns and a slower GDP growth recovery. Our results also hold for a single regression of daily spread changes during 2014-2020.

U.S. Macro Policies and Global Economic Challenges *

This paper overviews different exit strategies for the U.S. from the debt-overhang, and analyses their implications for emerging markets and global stability. These strategies are discussed in the context of the debates about secular-stagnation versus debt-overhang, the fiscal theory of the price level, the size of fiscal multipliers, prospects for a multipolar currency system, and historical case studies. We conclude that the reallocation of U.S. fiscal efforts towards infrastructure investment aiming at boosting growth, followed by a gradual tax increase, aiming at reaching a modest primary fiscal surplus over time are akin to an upfront investment in greater long-term global stability. Such a trajectory may solidify the viability and credibility of the U.S. dollar as a global anchor, thereby stabilizing Emerging Markets economies and global growth.