ABSTRACT
We assess the individual and compounding impacts of COVID-19 and climate physical risks in the economy and finance, using the EIRIN Stock-Flow Consistent model. We study the interplay between banks' lending decisions and government's policy effectiveness in the economic recovery process. We calibrate EIRIN on Mexico, being a country highly exposed to COVID-19 and hurricanes risks. By embedding financial actors and the credit market, and by endogenising investors' expectations, EIRIN analyses the finance-economy feedbacks, providing an accurate assessment of risks and policy co-benefits. We quantify the impacts of compounding COVID-19 and hurricanes on GDP through time using a compound risk indicator. We find that procyclical lending and credit market constraints amplify the initial shocks by limiting firms' recovery investments, thus mining the effectiveness of higher government spending. When COVID-19 and hurricanes compound, non-linear dynamics that amplify losses emerge, negatively affecting the economic recovery, banks' financial stability and public debt sustainability.
ABSTRACT
There was an outcry from policymakers over sovereign credit rating downgrades of African countries during the unprecedented COVID-19 lockdown periods. This study investigates whether sovereign downgrades during the time African countries were hit by COVID-19 had an impact on sovereign bond yields. Applying an event study analysis on the Eurobonds yields of 4 African countries that were downgraded during this period shows that there is significant evidence of excess volatility around the downgrade event and a net increase in yields within the rating event window. The results align to the view that rating agencies negatively impact macroeconomic conditions through their procyclical ratings. Hence, ratings should be regulated and controlled during crises times to avoid the procyclical impact of ratings.