Conference on Economic and Monetary Policy in Advanced and Emerging Market Economies in the times of COVID-19

CEMLA, Federal Reserve Bank of New York and European Central Bank

July 7 – 9, 2021


The Conference on Economic and Monetary Policy in Advanced and Emerging Market Economies in the times of COVID-19 was held in digital format from July 7 to July 9, 2021. It was jointly organized by the Center for Latin American Monetary Studies (CEMLA), the Federal Reserve Bank of New York (FRBNY), and the European Central Bank (ECB). This conference was aimed at researchers from CEMLA's central banks membership and participants of the central bank and the academic community at large. Its objectives were to stimulate the discussion of research on current monetary policy issues and to shed light upon the economic effects of the pandemic and the trade-offs that it has entailed. The event was complemented with three invited talks and a discussion between high-rank central bank officials in a policy roundtable moderated by Dr. Manuel Ramos-Francia, General Director of CEMLA.

Dr. Ramos-Francia delivered the opening remarks. He emphasized the importance of having research divisions within central banks, particularly for the case of Emerging Market Economies (EMEs), as they can deepen the understanding of their particular context by adapting the theory, frameworks, and methodologies used in Advanced Economies (AEs), and promote the cross-pollination of ideas within their divisions and across institutions. Second, he elucidated CEMLA's role in enhancing several processes associated with the research of its members, highlighting the importance of international cooperation. He pointed that, while the pandemic has posed some challenges to its logistics, the Center has made resources available for the dissemination of research in the region such as conferences and events held in digital format. Finally, he provided an overview of the papers that were about to be presented.

I. Epidemiological and Economic Factors

The first session was dedicated to papers that have studied the economic costs of the pandemic and changes in the macroeconomic dynamics due to the presence of the virus, its associated mortality rate, and its transmission dynamics. The session started with The Coronavirus and the Great Influenza Pandemic: Lessons from the "Spanish Flu" for the Coronavirus's Potential Effects on Mortality and Economic Activity by Barro et al. (2020). In this paper. The authors estimate the macroeconomic impact of the Great Influenza Pandemic in 1918-1920, aiming to isolate its effect from World War I-related deaths. This is to provide a reasonable upper bound for the impact of the COVID-19 pandemic with the use of panel regressions and cross-country data from 48 countries. For instance, their results show the Great Influenza Pandemic's 2.1% death rate reduced real per capita GDP by 6.2%, had a negative effect on both the GDP and consumption growth.

The second study was entitled The Cost of Privacy: Welfare Effects of the Disclosure of COVID-19 Cases by Argente et al. (2020). Their work incorporates endogenous commuting flows into an SIR model with subpopulations, differentiated by their health status and age, to mimic the COVID-19 spread dynamics and quantify the effect of public disclosure of information on virus transmission and economic losses within the city of Seoul. They reproduce the following empirical features using mobile phone location data to calibrate the model: a reduction of inflows in districts with higher positive cases, a higher sensitivity of weekend flows to positive cases compared to the ones relative to weekdays, and the fact that commuting flows from 60+ years old individuals are the most sensitive to information on COVID. Finally, they compare the welfare dynamics of their model under two scenarios, public disclosure vis-à-vis a full lockdown. They conclude that, in the absence of a vaccine and under the assumption of achieving herd immunity in two years, the economic loss associated with a public disclosure framework is 73% lower.

The third paper of the first session was Humans Against Humans: A Game Theory Approach to the COVID-19 Pandemic. Under the presence of externalities and asymmetric information regarding the health status of individuals, measures to prevent contagion have had an impact by decreasing economic activity. This paper studies the welfare costs associated with these characteristics through a framework that combines a game theoretical-set up and a Macro-SIR model proposed by Eichenbaum et al. (2020). They extend the model to include asymptomatic infected people, which entails a key source of information loss. Their micro-founded model quantifies the costs of privacy, determines how different degrees of information affect contagion spread and economic outcomes, and suggests an optimal policy to reduce the adverse effects of a pandemic. The authors apply the model to the U.S. case and analyze the recent COVID-19 crisis. In quantifying the effects of a policy of disclosure and divulgation of private health information, they find relief for both economic and health aspects.

II. Monetary Policy and Credit Supply in the times of COVID-19

The next session was focused on a group of papers that examine the effects of monetary policy measures in the times of COVID-19. The first paper was The ECB Monetary Policy Response to the COVID-19 Crisis by Aguilar et al. (2020). The authors provide a review of the European Central Bank's rationale for its policy response to the COVID-19 pandemic. Then they list the main measures that the ECB has taken since the outbreak of COVID-19, including the asset purchase programs (APP and PEPP) and the longer-term refinancing operations (LTRO, TLTRO III, and PELTRO). Then, they present their assessment on the impact of the PEPP in the euro area and Spain. Using an event study approach, their results indicate that the initial announcement of the program and its ensuing increase had a positive effect on the main stock market indices by reducing stock market volatility. Next, they propose a DSGE model with financial frictions to incorporate the PEPP announcements, where bond purchases lower long-term interest rates and investment portfolios' average yield decline, savings decrease, consumption, employment, inflation, and GDP increase.

The following paper is entitled Motivating Banks to Lend? Credit Spillover Effects of the Main Street Lending by Minoiu et al. (2021), it studies the effects of the Main Street Program (MSLP)–an emergency lending program established by the Federal Reserve to support the flow of credit to SMEs on bank lending. It stands out for relying on the banks' ability to screen and originate loans. The authors examined the factors that determine the banks' decision to participate in the program and conducted a difference-in-difference analysis to compare changes in overall commercial and industrial (C&I) loans lending standards.

The authors found that larger banks were more likely to participate, had more C&I-concentrated loan portfolios, and had lower capital buffers and were more funding constrained. Regarding the effects of the program, bank participation was associated with relatively less tightening of C&I lending standards, a higher likelihood of originations, renewals, lower loan spreads, longer maturities, and lower collateral requirements. MSLP participants extended relatively more small business loans, indicating that the program served as a backstop to the bank-loan market.

The session concluded with the presentation of The Credit Channel Through the Lens of a Semi-Structural Model, in which Arroyo et al. (2021) estimate a semi-structural model–based on the semi-structural gap forecasting model (MPES, for its acronym in Spanish) derived from a New Keynesian model, with a banking sector by incorporating commercial loans, interest rate spreads, and the provision of funds for loan defaults. They calibrate the model for the 2000-2020 period using Chilean data and a Bayesian approach. The authors estimate impulse response functions and find that the banking sector plays an accelerating role in the business cycle, as a higher output gap increases credit loans, reduces loss provisions and, thus, increases aggregate demand.
On the second day of the conference, Professor Alessandro Rebucci gave the first invited talk: COVID-19: A Double Whammy of Financial and Economic Sudden Stops for Emerging Economies. In this paper, the authors analyze the impact of the COVID-19 shock in EMEs and determine that a financial sudden stop caused by the decline of economic activity lockdowns and social distancing restrictions. Based on the results from the estimation of a DSGE model with occasionally binding borrowing constraints with data for Mexico, they state that crises propagated through financial frictions can be followed by quick but partial economic rebounds. They conclude that the disruptions caused by the COVID-19 pandemic would lead to prolonged stagnation below the pre-crisis levels and highlighted the need for cooperation of the international financial community and the adoption of unconventional monetary policies by EMEs.

III. COVID-19 Impact on Households and Firms

The session began with the presentation of Informal Labor Markets in Times of Pandemic: Evidence for Latin America and Policy Options by Gustavo Leyva and Carlos Urrutia, a study that analyzes the formal and informal labor market dynamics within five Latin American countries–Brazil, Chile, Colombia, Mexico, and Peru—with two approaches. First, through a survey-based empirical analysis the authors documented the following stylized facts: i) an unprecedented decline in employment rates, ii) a slight increase in unemployment rates, coupled with an instant decline in the mean of unemployment duration, iii) falling informality rates, iv)  Brazilian flows of employment were characterized by less job creation from inactivity and to the informal sector, whereas v) in Mexico flows of employment were characterized by more job destruction to inactivity and from the informal sector. They propose a DSGE model, calibrated with Mexican data, for a SOE with a labor-leisure choice, search and matching frictions, and an informal employment choice assumed to be more flexible than formal employment, but also less productive. To account for the COVID-19 pandemic, the authors incorporated two shocks, an increase of the work disutility parameter and a decrease of the informality sector productivity parameter. They simulated recovery scenarios comparing different policy options and concluded that, while their results show that policies that target job creation in the formal sector might be the most cost-effective option to speed up employment and output recovery, their implementation might be cumbersome.

The session was finalized with the presentation of The Distribution of Crisis Credit and Firm Indebtedness, an empirical study by Huneeus et al. (2021). This paper analyzes the effects of the facilities granted by the Chilean government. The authors studied the effects of a 10-billion-dollar credit facility using high-frequency data from 151,961 firms. They examine the presence of adverse selection behavior, disentangle demand and supply factors in the distribution of credit, and observe the aggregate level of firm indebtedness. They find that the program encouraged new credit. On the demand side, they document that riskier firms that applied for credit and were more likely to apply for guaranteed loans. They find a relatively passive role on the supply side, as bank screening was weak. Firm indebtedness increased sharply across firms, with ratios of debt-to-net-worth rising substantially. Their results did not appear to be affected by the COVID-19 pandemic. The authors compare the demand for credit-secured loans and the demand for an employment protection program. They document the importance of program incentives: if the firms pay a cost to access government support, adverse selection decreases. The authors highlighted the trade-offs of the program: (i) rapid support for firms against higher future default risk and (ii) the effects of the distribution of credit.

Linda Goldberg, in the second invited talk, presented Volatile International Capital Flows to Emerging Markets: Pandemic Updates and Lessons Learned. She revisited insights on capital flows for AEs and EMEs before and after the pandemic shock, discussed the amplification factors on the volatility of capital flows, and explained the effectiveness of innovations on intervention toolkits. On the evolution of capital flows, she stated that while cross-border lending has shown to be more volatile, particularly for EMEs bank borrowers, during COVID-19 bank-based credit held well. In terms of drivers and vulnerabilities of capital flows, she pinpointed that weak and under-capitalized global banks, synchronized advanced economy policy responses and big changes in risk sentiments by investors remain as amplification factors. She argued that the crisis highlighted a "bright spot" in regulatory and policy changes to past vulnerabilities because banks have had better risk management and have provided a stabilizing role in global liquidity flows during COVID-19. She added that the diversity of business models helped support global liquidity flows. Finally, she stated that while there was a rush for liquidity, which challenged market functioning, the provision of liquidity from the Federal Reserve in their local and foreign markets reduced the risk of added Treasury market strains and disruptions.

IV. Capital flows

The first work presented during this session was Capital Flows at Risk: Taming the Ebbs and Flows. Gelos et al. (2021) propose a quantile regression framework to estimate the entire conditional probability distribution of the expected future portfolio flows as a function of global factors, local factors, and prevailing policy shocks. Their main findings, in terms of structural characteristics and policy frameworks were: i) in the short term, greater financial market depth increases the rebound likelihood in capital flows after an adverse shock in global financial conditions ii) more flexible exchange rate regimes are associated with higher probabilities of larger inflows and outflows in response to global shocks, iii) medium-term inflows are correlated with a higher-quality legal framework and lower perceptions of corruption. A tightening of capital flow measures is associated with larger outflows in the short term. They conclude by highlighting the importance of country-specific factors on the mitigating role of policy with the comparison of two case studies done for Chile and Turkey.

The paper Bonds Flows at Risk: Global, Local, and Pipe Factors in Latin America, by Ramos-Francia et al. (2021) analyzes the distribution and determinants of bond flows from Brazil, Chile, Colombia, Mexico, and Peru, with a particular assessment on the relevance of pipe factors using quantile regression and EFPR weekly data. Their approach pursues to disseminate the effects of global factors—measured by the VIX index—, local factors—represented by term-premium spreads—, and pipe factors—as captured by the changes in international reserves, the proportion of local currency-denominated bonds held by non-resident investors, and EMTA bond trading volume. Additionally, the authors explore whether the sensibility to the global factor is regime-dependent by incorporating a Markov-switching model. Their main results indicate that, while both the local and the global factors are negatively correlated to the distribution of bond flows, the impact of their global factor tends to dominate those of their local factor. In addition, pipe factors play a key role in the determination of the volatility of bond flows

Professor Gianluca Benigno presented the implications and consequences of the use of Quantitative Easing (QE) in EMEs after the COVID-19 shock in his talk The Rationale for QE in Emerging Markets. He presented some observations contrasting the use of QE in EMEs and AEs. Then, he elucidated the motives behind the adoption of such policy and enumerated the improvement of liquidity in the local currency bond market, the provision of additional monetary stimulus, and the easing of government financing pressure in the face of the pandemic. He mentioned that the condition under which it has been possible for EMEs to engage with QE were: i) the ability to borrow in local currency at sovereign level, ii) a flexible exchange rate regime, and iii) a solid institutional framework. Professor Benigno also discussed the risks in the use of this policy for EMEs where he mentioned the risk of excessive depreciation, which could lead to inflation expectations' de-anchoring, the possible reduction of policy space for central banks in EMEs.

V. Unconventional Monetary Policies in EMEs and Global Uncertainty

Unconventional Monetary Policies in Emerging Market and Frontier Countries by Fratto et al. (2021), presented a new dataset of Asset Purchase Programs (APP) and their implementation for 27 EMEs and 8 AEs. They implement an event-study methodology and panel regressions to explore the effectiveness of unconventional monetary policy measures in emerging economies. Their main findings include that (i) APP announcements were effective in reducing bond yields to a greater degree than conventional monetary policies implemented in the early stages of the pandemic, nonetheless, they showed little effect on exchange rates and external borrowing costs; (ii) FX intervention programs had a positive and significant effect on bond yields; (iii) factors such as high central bank credibility, high monetary policy space, and low shares of non-resident holdings of government bonds improved the outcomes of APPs, while (iv)  other characteristics such as transparency, foreign investment share, and type of monetary or exchange rate regime that showed little to no-impact.

The last presentation was Global uncertainty and the dollar by Georgiadis et al. (2021). Inspired by the co-movement between the U.S. dollar appreciation and global uncertainty—measured by the VIX index—, their work aims to answer whether the U.S. dollar appreciation dampens or amplifies the effects of global risk shocks on the rest of the world. The authors suggest the U.S. dollar appreciation could be a transmission vehicle of global uncertainty shocks through two competing channels, the trade channel and the financial channel. Their approach consists of the estimation of a Bayesian SVAR model with U.S. data for 1990-2019, the identification of global risk shocks using gold price changes, and the conduction of counterfactual analysis. The authors document that: i) global risk shocks induce U.S. dollar appreciation, a rise in risk aversion, the slowdown in economic activity in the U.S. and the rest of the world, and the contraction of U.S. exports and global cross-border bank credit, ii) under the hypothetical absence of U.S. dollar appreciation against the global uncertainty shock, the contractionary effects of the shocks decrease compared to the baseline scenario, suggesting that the financial channel dominates the trade channel, and  (iii) the adverse consequences of this phenomenon could be prevented if the US monetary policy were to adopt a more accommodative stance stabilizing the dollar exchange rate.

VI. Policy Roundtable: Monetary Policy in times of COVID-19

The conference concluded with the participation of Linda Goldberg—Senior Vice President at the Federal Reserve Bank of New York—, Livio Stracca—Deputy Director General International and European Relations at the European Central Bank—, Daniel Chiquiar—Director General of Economic Research at the Bank of Mexico—, and Elías Albagli—Director of the Monetary Policy Division at the Central Bank of Chile—in a policy roundtable moderated by Dr. Manuel Ramos-Francia. The discussion focused on three topics: the inflation outlook in AEs and EMEs in the region, capital flows, and the use of unconventional monetary policies in EMEs.

Linda Goldberg expressed some concern on the flow of international capital under a context of heterogeneous and asynchronous economic recovery and policy normalization, as the strength of domestic banks and their ability to support economic growth could be affected by spillovers through global and international banks and international capital flows. She emphasized that "the direction and magnitude of international flows of credit by country can differ by the types of policies that respond and also be influenced by underlying conditions of banks at home and abroad". She concluded by stating that close monitoring of the interaction between policies and banks' ability to support economic recovery would be crucial, as recovery is critical at this stage.

Mr. Stracca based his interventions on Ferrero, Habib, Stracca, and Venditti (2021) and The changing patterns of capital flows CGFS report. He explained the main differences between the COVID-19 crisis and the Global Financial Crisis and discussed capital flows dynamics, economic policy responses, and the role of institutions. He commented on the amplified role of market finance, particularly since March 2020, and addressed the resiliency of EMEs during the pandemic. He concluded by enlisting some arising questions for further research, including the classification of countries in EMEs and AEs, the possible "graduation" of emerging market economies, the role of market discrimination, recovery heterogeneity, and the consequences of a possible higher inflation environment.

Daniel Chiquiar mentioned the three shocks that occurred during the pandemic: a financial shock—which implied capital outflows for EMEs, increases of premia, a deterioration of their financial conditions, and depreciation from pressures from other currencies—, a supply shock—largely due to the confinement measures—and a demand shock—which has been reverting during the recovery process, but in a heterogeneous way across sectors. He talked about the general trade-offs of policy implementation and the short-term consequences of policy responses during the pandemic and elaborated on the Mexican experience. He concluded by mentioning some of the challenges the EMEs will face in a possibly volatile post-pandemic environment, such as increased global inflation at a time where economic activity remains below its potential and a context of more difficult trade-offs for monetary authorities.
Elías Albagli explained the context and recent development of the Chilean economy. Its economic activity and growth expectations have improved. This is attributed to three factors (i) an improvement in the adaptation to operate before the lockdown, including safety protocols, online sales, among others; (ii) the survival of companies, through the provision of central bank liquidity and government guarantees; and (iii) household liquidity support. However, he noted that while economic activity shows recovery, the job market remains the key source of uncertainty, and inflation is increasing due to demand pressure.


July 7, 2021


Opening Remarks
Manuel Ramos-Francia, Director General, CEMLA

Session I. Epidemiological and Economic Factors

Macroeconomics of the Great Influenza Pandemic, 1918-1920
José F. Ursúa (Dodge & Cox) joint with Robert Barro (Harvard University) and Joanna Weng (EverLife).
Paper Presentation

Discussant: Juan Ospina

The Cost of Privacy: Welfare Effects of the Disclosure of COVID-19 Cases
David Argente (Pennsylvania State University) joint with Chang-Tai Hsieh (University of Chicago) and Munseob Lee (University of California San Diego).
Paper   Presentation

Discussant: José F. Ursúa

Humans Against Virus or Humans Against Humans: A Game Theory Approach to the COVID-19 Pandemic
Juan Ospina joint with Santiago Forero and Nicolás Moreno (Banco de la República (Colombia).
Paper   Presentation

Discussant: David Argente

Session II. Monetary Policy and Credit Supply in the times of COVID-19

The ECB Monetary Policy Response to the COVID-19 Crisis
Pablo Aguilar joint with Óscar Arce, Samuel Hurtado, Jaime Martínez-Martín, Galo Nuño, and Carlos Thomas (Banco de España).
Paper   Presentation

Discussant: Francisco Arroyo Marioli

Motivating Banks to Lend? Credit Spillover Effects of the Main Street Lending Program
Andrei Zlate joint with Camelia Minoiu and Rebecca Zarutskie (Federal Reserve Board).
Paper   Presentation

Discussant: Pablo Aguilar

The Credit Channel Through the Lens of a Semi-Structural Model
Francisco Arroyo Marioli joint with J. Sebastián Becerra and Matías Solorza (Banco Central de Chile).
Paper   Presentation

Discussant: Andrei Zlate


July 8, 2021

Invited Paper

COVID-19: A double whammy of financial and economic sudden stops for emerging economies
Alessandro Rebucci (John Hopkins University) joint with Gianluca Benigno (Federal Reserve Bank of New York), Andrew Foerster (FRBSF), and Christopher Otrok (FRBSL).

Session III. COVID-19 Impact on Households and Firms

Informal Labor Markets in Times of Pandemic: Evidence for Latin America and Policy Options
Gustavo Leyva (Banco de México) joint with Carlos Urrutia (ITAM).
Paper   Presentation

Discussant: Federico Huneeus

The Distribution of Crisis Credit and Firm Indebtedness
Federico Huneeus (Banco Central de Chile) joint with Joseph P. Kaboski (University of Notre Dame), Mauricio Larraín (PUC & CMF), Sergio L. Schmukler (World Bank), and Mario Vera (CMF).

Discussant: Gustavo Leyva

Invited Presentation

Volatile International Capital Flows to Emerging Markets: Pandemic Updates to Lessons Learned
Linda S. Goldberg (Federal Reserve Bank of New York).

Session IV. Capital Flows

Capital Flows at Risk: Taming the Ebbs and Flows
Silvia Sgherri joint with Gastón Gelos, Lucyna Gornicka, Robin Koepke, and Ratna Sahay (IMF).
Paper    Presentation

Discussant: Santiago García-Verdú

Bonds Flows at Risk: Global, Local, and Pipe Factors in Latin America
Santiago García-Verdú (Banco de México and CEMLA) joint with Manuel Ramos-Francia (CEMLA), José Manuel Sánchez (Banco de México and CEMLA) and Serafín Martínez-Jaramillo (Banco de México and CEMLA).

Discussant: Martín Tobal (Banco de México)


July 9, 2021

Invited Presentation

The Rationale for QE in Emerging Markets
Gianluca Benigno (Federal Reserve Bank of New York).

Session V. Unconventional Monetary Policies in EMEs and Global Uncertainty

Unconventional Monetary Policies in Emerging Markets and Frontier Countries
Chiara Fratto joint with Brendan Harnoys Vannier, Borislava Mircheva, David de Padua, and Hélene Poirson (IMF).

Discussant: Ben Schumann

Global Risk and the Dollar
Ben Schumann (Free University of Berlin) joint with Georgios Georgiadis (European Central Bank) and Gernot J. Müller (University of Tübingen and CEPR).
Paper   Presentation

Discussant: Chiara Fratto

Session VI. Policy Roundtable: Monetary Policy in times of COVID-19

Policy Roundtable
Chair: Manuel Ramos-Francia, General Director (CEMLA).

Linda Goldberg (FRBNY)
Livio Stracca (ECB)
Daniel Chiquiar (Banco de México)
Elías Albagli (Banco Central de Chile)