2021 Joint Research Program
XXVI Meeting of the Central Bank Researchers Network

Macroeconomic Policy Responses to COVID-19

Nelson Ramírez Rondán
Benjamín Tello Bravo


The Center for Latin American Monetary Studies’ (CEMLA) Board of Governors created the Joint Research Program with the dual aim of promoting the exchange of knowledge among researchers from Latin American and Caribbean central banks and of providing insights on topics that are of common interest to the region. Annually, the Central Bank Researchers Network chooses a subject to study among its members. The collection of papers in the Joint Research Program contains research by researchers from CEMLA’s associates and collaborating members. It is published as a working paper series to encourage debate among the central bank and academic community. The views expressed in the Joint Research Program are those of the author(s) and do not necessarily represent the views of their central banks, CEMLA’s Board of Governors, or CEMLA’s Staff. Previous volumes are available at https://www.cemla.org/jointresearch.html.

The advent of the COVID-19 pandemic, first and foremost, represented a public health challenge for governments, which sought measures to contain its contagion, not without also trying to minimize the economic toll of lockdowns and social distancing. The crisis was characterized by its heterogeneous impact across regions, sectors, and individuals. Hence, policy response packages were forceful and widespread, and notably, central bank intervention in Latin America and the Caribbean was crucial for the recovery.

To document the experience of some of CEMLA's Member countries, the 2021 Joint Research Program was devoted to Macroeconomic Policy Responses to COVID-19 with the outstanding support of David Argente—Assistant Professor at Penn State University—as this edition's Academic Advisor. The 2021 Working Paper Series consisted of eight research papers from authors affiliated with the central banks of Brazil, Chile, Costa Rica, Mexico, Uruguay, and Spain.

The papers cover the following topics in the context of the COVID-19 pandemic crisis: i) providing measures of financial restrictions for firms and studying the effectiveness of credit policies in Brazil; ii) the disentanglement of the margins (extensive and intensive) through which the aggregate trade outcomes were affected in Chile; iii) an analysis of the effectiveness of health measures in Costa Rica at the local level on the weekly growth rates of confirmed cases and deaths and its effect on economic activity; iv) the identification of supply and demand factors that determined the economic activity sectoral performance in Mexico; v) an analysis of the heterogeneous effects on regional gross output in Mexico; vi) an evaluation the impact of policies implemented in Uruguay; vii) the provision of GDP growth projections for Brazil and Mexico and conduction of risk scenarios with the use of BVAR; and viii) an assessment of labor reallocation dynamics and the extent to which employment-retention schemes deployed during the pandemic may have affected them in Germany, France, Italy, and Spain.

Disruptions in Global Supply Chains and their Effects in Mexico’s Regional Gross Output in the Context of the COVID-19 Pandemic
Jorge Alvarado, Eva González, Cindy Rangel, Alejandrina Salcedo and Leonardo Torre


The paper analyzes how the initial disruption in the supply of imported inputs associated due to the COVID-19 pandemic may have induced heterogeneous responses in regional and sectoral output in Mexico. For this objective, we estimate, using Input-Output techniques, the effects on Mexican gross output associated to the supply-side shock that ensued from the lack of imported inputs from China, the European Union, and the United States at the onset of the pandemic. Our estimates suggest that the contraction in imports of intermediate inputs reduced national gross output by 1.11% in 2020, most of it accounted for the contraction in imported inputs from the U.S., followed by those from the European Union, and China. The Northern region experienced the strongest effect, while simultaneously contributing the most to the impact on national gross output. At the sectoral level,the manufacturing sector was the most affected by the shock.

A BVAR toolkit to assess macrofinancial risks in Brazil and Mexico
Erik Andres-Escayola, Juan Carlos Berganza, Rodolfo G. Campos and Luis Molina


This paper describes the set of Bayesian vector autoregression (BVAR) models that are being used at Banco de España to project GDP growth rates and to simulate macrofinancial risk scenarios for Brazil and Mexico. The toolkit consists of large benchmark models to produce baseline projections and various smaller satellite models to conduct risk scenarios. We showcase the use of this modeling framework with tailored empirical applications. Given the material importance of Brazil and Mexico to the Spanish economy and banking system, this toolkit contributes to the monitoring of Spain’s international risk exposure.

Impact of COVID-19 Restrictions in Costa Rica: a Local Approach
José Pablo Barquero Romero, Esteban Méndez-Chacón, and Carlos Segura-Rodriguez


During the COVID-19 pandemic, governments have implemented restrictive measures to impede mobility, aiming to reduce the number of infections and deaths caused by the disease. However, these measures harm economic activity. This study uses municipality variation in the restrictions that the government has implemented in Costa Rica to measure the effects of these restrictions on economic activity and health outcomes. We collect data on the sanitary alerts and restrictions announced by the government from March 15th, 2020 to July 31st, 2021, and use electricity consumption to approximate economic activity. We estimate that imposing a more restrictive sanitary alert reduces the weekly growth rate number of cases by 7% and of deaths by 10%, but it reduces commercial electricity consumption by 1.5%, which we associate with a decrease in economic activity of about 1.88%.

COVID-19 in Uruguay: A survey of policy responses and their impact
Elizabeth Bucacos, Patricia Carballo, Miguel Mello and Jorge Ponce


COVID-19 implied an overwhelming shock with large economic consequences. In this paper, we provide an evaluation of the impact of the social, economic, and financial policy measures undertaken to ameliorate its negative consequences in Uruguay. We start by surveying the immediate impact of the shock and the main policy responses. Next, we take a threefold approach to evaluate their impact on GDP, inflation, inflation expectations, investment, consumption, hours worked and firms’ financing. The results show that the policy response had a significant effect on mitigating the negative impact of the pandemic.

Sectoral Supply and Demand Shocks during COVID-19: Evidence from Mexico
Ricardo Chavarín, Ricardo Gómez, and Alfredo Salgado


The COVID-19 Pandemic has entailed both supply and demand shocks. Nevertheless, it is uncertain to what extent one or the other factor was more important in accounting for the evolution of prices and economic activity at different points since the onset of the COVID-19 Pandemic. Whether inflationary pressures are mainly due to demand or supply shocks can matter for the stance of monetary policy. Employing a sign-restricted SBVAR, we study supply and demand factors as potential sources of heterogeneity in sectoral performance in Mexican economic activity. We find that during the peak contraction in 2020-2Q, the demand shock was the dominant source of fluctuation across most sectors. Moreover, we assess the extent to which economic activity responds to foreign shocks and find that domestic demand shocks are the primary driver of GDP fluctuations in 2020-2Q, with external demand and supply conditions and exchange rate shocks also playing a significant role. In contrast, since the beginning of 2021, external supply has contributed negatively to the variation of several sectors, particularly in industrial production, while domestic and external demand factors have generally contributed positively.

Sectoral Reallocation of Euro Area Employment after the Covid-19 shock
Ángel Luis Gómez


Reflecting the larger direct impact of the pandemic on more contact-intensive work, the COVID- 19 shock has been highly asymmetric in its employment effects across sectors. The COVID-19 pandemic led to the sharpest contraction on record in total hours worked, while policy support in the form of job retention schemes helped to protect employment. The speed of recovery is noticeable in all sectors of the economy, although those who suffered the largest declines (trade, transportation and accommodation and food service, together with arts and entertainment), are still well below their pre-crisis level. In terms of job vacancies, recovery is much more generalised across sectors and those most affected by the pandemic are suffering noticeable labour shortages. This paper seeks to assess the extent of the reallocation shock for the euro area economy, focusing on its four biggest countries. The excess job reallocation rate calculated from the EU-LFS microdata for the aggregate of the four largest euro area economies decreased almost 2 pp in 2020, against the increases that firm-level data show for the United States and the United Kingdom. That development in the euro area was also very different to that observed in 2009, mainly due to a smaller increase in separations during the COVID-19 crisis. In the latter respect, the role played by the job retention schemes should be re-emphasised.

Measuring Financial Restrictions of Brazilian Private Firms with Microdata: Did Credit Policies of Banco Central do Brasil in Covid-19 Pandemic Affect Investment Demand?
Fernando Oliveira


Our contributions in this paper are twofold. In the first place, we build original financial restriction measures of 8,071 private firms in Brazil. We use these measures to have an idea of their level of financial restrictions from 2012 to 2020. To build these measures, we use microdata of 3,469,135 loan contracts written between these firms and financial institutions in this period. In the second place, we estimate, using our financial restriction measures, investment demand of these firms and verify if credit policies of the Banco Central do Brasil during the Covid-19 pandemic had any positive effect in mitigating their credit restrictions. Our results show that our financial restriction measures explain well the access of Brazilian private firms to credit for investment as well as indicate that their investment is negatively related to financial restrictions in Brazil. Furthermore, they also show that credit policies of Banco Central do Brasil had positive effect on working capital loans of private firms but did not have any effect on their investment in the Covid-19 pandemic period.

International Sourcing during Covid-19: How did Chilean firms fare?
Jennifer Peña and Elvira Prades


Covid-19 has proven to be a unique and complex shock for firms. In a relatively short time span, firms have faced dramatic declines in demand, and from the production side, have faced labor shortages, the need to re-organize their tasks to keep up with health restrictions, and have dealt with supply disruptions in their input materials. In this paper we analyze the performance of individual Chilean firms during this episode, drawing on administrative datasets. In particular we focus on the sample of firms participating in international trade in goods and we document several empirical findings. Importer firms, specially in the manufacturing sector, have adjusted their import flow through several margins, the intensive and the extensive margins, either by stopping the import activity or by importing less product varieties. Importers faced a short-lived increase in imported input costs. While exporter firms seem to have been less affected. An additional source of heterogeneity is the size of firms. At the start of the pandemic, both large and SMEs firms largely reduced the number of product varieties. Notwithstanding, SMEs showed a fastest recovery, which may be related to the fact were the firms that mostly accessed the support policies deployed by the Chilean authorities to mitigate the economic impacts of the Covid-19. We also explore if foreign factors such as the Covid-19 related health situation in partner countries, by considering the number of cases and stringency measures, had an impact on Chilean imports during 2020/21.