COVID-19 and emerging markets: A SIR model, demand shocks and capital flows

Abstract

We quantify the macroeconomic effects of COVID-19 for a small open economy. We use a two-country framework combined with a sectoral SIR model to estimate the effects of collapses in foreign demand and supply. The small open economy (country one) suffers from domestic demand and supply shocks due to its own pandemic. In addition, there are external shocks coming from the rest of the world (country two). Aggregate exports of the small open economy decline when foreign demand goes down, and aggregate imports suffer from lockdowns in the rest of the world. We calibrate the model to Turkey. Our results show that the optimal policy, which yields the lowest output loss and saves the maximum number of lives, for the small open economy, is an early and globally coordinated full lockdown of 39 days.