the macroeconomics of covid-19
TRANSCRIPT
The Macroeconomics of COVID-19
Introductory course:
The Economics of COVID-19 in Developing East Asia and the Pacific
November 20211
Roadmap of the Presentation
• The COVID-19 shock
• Monetary and fiscal policy response.
• Monetary and fiscal policy challenges.
2
GDP, 2019Q4 = 100
Slow recovery and a reversal of fortune
80
90
100
110
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2019 2020 2021
China Indonesia Malaysia
Philippines Thailand Vietnam
Ind
ex
COVID-19 outbreak
Delta variant
80
90
100
110
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2019 2020 2021
China Indonesia Malaysia
Philippines Thailand Vietnam
Index
COVID-19 outbreak
Delta variant
-6
-4
-2
0
2
Mo
ng
olia
So
lom
on
Isla
nd
s
Tim
or-
Le
ste
Pa
pu
a N
ew
Gu
ine
a
Th
aila
nd
Sa
mo
a
La
o P
DR
Ma
laysia
Va
nu
atu
Ch
ina
Fiji
Ind
on
esia
Vie
tna
m
To
ng
a
Ca
mb
od
ia
Ph
ilip
pin
es
Mya
nm
ar
Employment to populationPercentage points
Employment to population and Labor Force Participation
-6
-4
-2
0
2
Mo
ng
olia
So
lom
on
Isla
nd
s
Tim
or-
Le
ste
Pa
pu
a N
ew
Gu
ine
a
Th
aila
nd
Sa
mo
a
La
o P
DR
Ma
laysia
Va
nu
atu
Ch
ina
Fiji
Ind
on
esia
Vie
tna
m
To
ng
a
Ca
mb
od
ia
Ph
ilipp
ine
s
Mya
nm
ar
Employment to labor force
Labor force to population
Percentage points
Declining employment and exit from the labor force
4
COVID-19 is both a supply and demand shock
5
Households lost livelihoods
(shock to demand)
Fiscal policy needed to help households (demand) and firms (supply).
Monetary policy needed to ensure flow of credit in the economy (supply).
P
Y
P0
Y0
Keynesian stimulus may be ineffective
Y1
Businesses closed
(shock to supply)
Policy emphasis depends on the state of the recovery
Note: The horizontal line indicates the level of GDP in December 2019..
China
Vietnam
Thailand
Indonesia
Malaysia
Philippines Fiji
Palau
Vanuatu
Lifeline for people
and firms
Targeted support
and promote restructuring
Support inclusive
and sustainable growth
Relief Recovery Long-term growth
6
Risk of inflation and unsustainable debt
•Expansionary monetary policy can lead to higher inflation
• Increased borrowing to support fiscal expansion can lead to financial instability
7
Central banks cut interest rates to support their economies
Source: East Asia and Pacific Economic Update, October 2021.
Monetary policy rate
8
0
2
4
6
8
10
12
Apr-19 Oct-19 Apr-20 Oct-20 Apr-21 Oct-21
China Indonesia Malaysia
Mongolia Myanmar PNG
Philippines Thailand Vietnam
Percent
Supportive monetary stance has not yet provoked inflation
-4
-2
0
2
4
6
8
Jan-2
0
Dec-2
0
Oct-
21
Jan-2
0
Dec-2
0
Oct-
21
Jan-2
0
Dec-2
0
Sep-2
1Ja
n-2
0
De
c-2
0
Oct-
21
Jan-2
0
Dec-2
0
Oct-
21
Jan-2
0
Dec-2
0
Oct-
21 -
China Indonesia Malaysia Philippines Thailand Vietnam
Inflation target range CPI inflationPercent
9
The increase in producer prices
-6
-3
0
3
6
9
12
Jun-19 Jan-20 Aug-20 Mar-21 Oct-21
CPI Core CPI PPIPercent
Inflation
-6
-3
0
3
6
9
12
Jun-19 Jan-20 Aug-20 Mar-21 Oct-21
CPI Core CPI PPIPercent
Drivers of consumer price inflation
hasn’t been passed to consumers,
in part because of well-anchored expectations
Source: EAP Economic Update October 2021. Left: Unweighted averages. Right: dependent variable: CPI inflation. Other explanatory variable: lagged inflation,
nominal USD exchange rate and output gap. Results similar for nominal effective exchange rate, import prices, oil prices and food prices.
0 0.5 1 1.5
Inflation expectations
Producer prices
Marginal effects
***
***
Risk of inflation and unsustainable debt
•Expansionary monetary policy can lead to higher inflation
• Increased borrowing to support fiscal expansion can lead to financial instability
11
Fiscal support increased significantly in response to COVID-19
B. Output gapsA. Government support
Output gaps suggest that fiscal support remains critical
12
Source: World Bank staff estimates.Notes: A. Figure shows fiscal support excluding health measures, below-the-line measures, and contingent liabilities.
All EAP countries have experienced an increase in public debt
Source: World Bank.
General government debt
13
r < g is not a license to spend
A. (r-g) differential C. Debt, growth and interest rates
Source: Consensus Economics; Haver Analytics; International Monetary Fund; J.P. Morgan; World Bank staff calculations.Notes: A. Nominal interest rates minus nominal growth; China, Indonesia, Malaysia, Philippines, Thailand, Vietnam. Red line: median; dashed lines: min and max. B. Estimated using a logit model that regresses an indicator of positive future r-gt+5 on an indicator of negative current r-g, indicators of debt groups based on the quartiles of the public debt-to-GDP distribution, and their interaction terms. Red squares denote point estimates and bars show 90 percent confidence intervals. C. Unweighted averages. The sample includes 50 developing (of which 10 EAP) countries with at least 10 observations on r-g and public debt over GDP over the period 2000-2019
in part because high deficits and debt can raise r and lower g
-20
-10
0
10
20
19
96
19
98
20
00
20
02
20
04
20
06
2008
2010
20
12
20
14
20
16
20
18
20
20
r-g, percentage points
B. Probability of r-g reversals
0
10
20
30
40
50
Quartile 1 Quartile 2 Quartile 3 Quartile 4
Public debt group
Estimated probability
0
10
20
30
40
50
Quartile 1 Quartile 2 Quartile 3 Quartile 4
Public debt group
Estimated probability
0
1
2
3
4
5
6
7
0-20 20-40 40-60 >60
Real GDP growth
Real interest rate
Percent
Debt to GDP
0
1
2
3
4
5
6
7
0-20 20-40 40-60 >60
Real GDP growth
Real interest rate
Percent
Debt to GDP
14
What can be done?
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Fiscal support today without instability tomorrow
• Increase efficiency of expenditure and investment.
• Introduce fiscal rules.
• Credibly commit to future fiscal reforms.
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Coping with the challenge from monetary policy actions abroad
• Central banks are likely to face trade-offs between continuing expansionary monetary
policy, containing inflationary pressures, and maintaining exchange rate stability.
• Trade-offs can be softened if inflation expectations are well anchored, foreign reserve
levels are significant, and there’s limited foreign currency debt.
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References
• Macroeconomic Implications of COVID-19: Can Negative Supply Shocks Cause Demand Shortages? By Veronica Guerrieri, Guido
Lorenzoni, Ludwig Straub, and Iván Werning
https://cpb-us-e1.wpmucdn.com/sites.northwestern.edu/dist/6/1682/files/2021/09/GLSW_2021.pdf
• The Aftermath of Debt Surges. By Ayhan Kose, Franziska L. Ohnsorge, Carmen M. Reinhart, and Kenneth S. Rogoff
https://www.nber.org/system/files/working_papers/w29266/w29266.pdf
• U.S. Monetary Policy Spillovers to Emerging Markets: Both Shocks and Vulnerabilities Matter. By Shaghil Ahmed, Ozge Akinci, and
Albert Queralto
https://www.federalreserve.gov/econres/ifdp/files/ifdp1321.pdf
• Does the new fiscal consensus in advanced economies travel to emerging markets? By Olivier Blanchard, Josh Felman, and Arvind
Subramanian
https://www.piie.com/publications/policy-briefs/does-new-fiscal-consensus-advanced-economies-travel-emerging-markets
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References
• Long COVID: The East Asia and Pacific Economic Update, October 2021. By the East Asia and Pacific Chief Economist Office, World
Bank.
https://openknowledge.worldbank.org/bitstream/handle/10986/36295/9781464817991.pdf?sequence=26&isAllowed=y
• Uneven Recovery: The East Asia and Pacific Economic Update, April 2021. By the East Asia and Pacific Chief Economist Office, World
Bank.
https://openknowledge.worldbank.org/bitstream/handle/10986/35272/9781464817021.pdf?sequence=18&isAllowed=y
• From Containment to Recovery: The East Asia and Pacific Economic Update, October 2020. By the East Asia and Pacific Chief
Economist Office, World Bank.
https://openknowledge.worldbank.org/bitstream/handle/10986/34497/9781464816413.pdf?sequence=39&isAllowed=y
• East Asia and the Pacific in the time of COVID-19: The East Asia and Pacific Economic Update, April 2020. By the East Asia and
Pacific Chief Economist Office, World Bank.
https://openknowledge.worldbank.org/bitstream/handle/10986/33477/9781464815652.pdf?sequence=42&isAllowed=y
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