Intermediate Meeting of the Working Group of the Joint Research, 2021

CEMLA-Banco de España

July 28 – 30, 2021


The Intermediate Meeting of the Working Group of the Joint Research Program was held in digital format from July 28 to July 30, 2021. It was jointly organized by the Center for Latin American Monetary Studies (CEMLA) and Banco de España. The conference was aimed at participants from CEMLA's 2021 Joint Research Program. This year we have Professor David Argente, who is at Penn State University, as the academic advisor. The 2021 Joint Research Program aims to contribute to the research on the economic impact of the pandemic and explore the economic policies associated with it. The title of the program is "Macroeconomic Policy Responses to COVID-19". This event seeks to provide participants with a forum to present and discuss the common research topic, in addition to showcasing the progress of their research. Please note that all results are preliminary and should not be cited.

Santiago García-Verdú gave the opening remarks. He emphasized that, despite the tragedy caused by the COVID-19 crisis, there have been silver linings such as the economic research conducted during this period. García-Verdú underscored CEMLA's contributing role to the processes related to economic research carried out in the region. Although the pandemic has posed some challenges in the logistics of CEMLA events, participation has increased. He mentioned some of the reasons that make economic research on the pandemic ambitious: the uncertainty on when and how this major event is going to end, the little consensus on a common modelling approach, and the country-specific character of policy responses. As part of his remarks, he provided an overview of the works to be presented.

The first presentation was Latin American Fall and Rebound since the COVID-19 by Luciano Campos, Danilo Leiva-León, and Steven Zapata. Motivated by the massive fluctuations in GDP exhibited by most Latin American countries during the COVID-19 episode and the challenges they might bring to reading the signs of the Latin American economy, the authors set out to i) track turning points in the region under an unstable economic environment and ii) assess how deep (strong) a recession (expansion) may be in the region. To explore the magnitude of the changes in real economic activity, the authors use a multivariate Markov-switching model with mixed frequency and ragged edges in which unconditional means vary over time to account for business cycle asymmetries. They estimate the model using quarterly GDP and monthly activity indicators for Argentina, Brazil, Chile, Colombia, Ecuador, Mexico, and Peru. They then construct two indicators. First, they summarize the models' inferences in the Latin American Weakness Index (LAWI), which provides timely assessments of LATAM's business cyclical position. Second, they developed a Latin American Intensity Index (LAII), which expresses the weighted average of the strength of economies given the phase of the business cycle. Finally, they explore some of their applications.

The second presentation was entitled Impact of COVID-19 restrictions in Costa Rica: a local approach by Esteban Méndez, José Pablo Barquero, and Carlos Segura-Rodríguez from Banco Central de Costa Rica. In this study, the authors explore, for the case of Costa Rica, the advantages of applying social distancing measures to reduce the spread and deaths of the COVID-19 and their costs in economic activity. In Costa Rica the restrictions have been tailored by municipality, the authors can conduct a panel regression analysis based on Chernoznukov et al. (2020) to measure the costs of restrictions on economic activity and the benefits of social distancing measures. They use electricity consumption as a proxy for economic activity. Their preliminary results suggest that the social distancing restrictions reduce the weekly growth rate of COVID-19 cases and deaths, although they also harm commercial activity, measured by a drop in commercial electricity consumption. Finally, they concluded their presentation with some robustness checks on their results.

The third research project presented was Measuring Financial Restrictions of Brazilian Private Firms with Microdata: Did Credit Policies of Banco Central do Brasil During the COVID-19 Pandemic Affect Investment Demand? by Fernando N. Oliviera. The objective of this study is threefold: first, to build measures of financial restrictions of Brazilian private firms using microdata; second, to use these measures to estimate investment demand in Brazil; and thirdly, to verify if the credit policies of Banco Central do Brasil (BCB) during the COVID-19 pandemic in 2020 had a positive impact on financial restrictions and firms' investment. He proposes a criterion for determining whether a firm is under a financial restriction, and uses a direct measurement approach to study them with 2010-2020 microdata from the BCB's Credit Information System. He classifies firms based on their probability to be restricted, separates the sample in Financially Restricted (FR) and Non-Financially Restricted (NFR), and estimates the investment demand functions of firms controlling for the credit policies of the BCB during the COVID-19 pandemic, adapting the approach of Fazarri et al. (1988). He also tests for cash flow sensitivities for FR and NFR firms using a VEC Model. With this information, he strives to understand the effect of the BCB's credit policies on the cash flow elasticities of investment in Brazil, particularly during the COVID-19 pandemic.

The second day of the meeting began with the presentation of COVID-19 in Uruguay: A survey of policy responses and their impact. In this work, Agustina Affonso, Elizabeth Bucacos, Patricia Carballo, Cecilia Dassatti, Miguel Mello, and Jorge Ponce from Banco Central del Uruguay, provide an overview of the policy responses adopted by the Uruguayan authorities in 2020 on three fronts: health and social distancing measures, social and economic measures, and financial measures. To examine the effects of COVID-19 in the Uruguayan economy and policy responses, the authors conduct an analysis using three methodologies: a historical decomposition analysis with the use of a New Keynesian semi-structural model, a VECM approach, and regression analysis used to study the firms' financial outlook. Their preliminary results are on the impact of monetary policy on inflation and economic activity, the effect of monetary and fiscal policy interactions on individual welfare, and changes in the dynamics of the Uruguayan credit market.

In the following presentation, International Sourcing and Producer Prices in Chile micro evidence during COVID-19, Elvira Prades and Jennifer Peña from Banco de España and Banco Central de Chile, respectively, use Chilean microdata to shed light on how firms adapted to the COVID-19 shock and how it impacted imports' prices by examining the bundle of imported intermediate inputs at the firm level. They document some preliminary findings on the firms' exports and imports dynamics: i) in terms of trade volumes, exports held relatively well, while imports declined substantially during the COVID-19 crisis; ii) the number of only-exporting, only-importing firms, and two-way traders declined, but the latter two showed a faster recovery to their pre-pandemic levels; iii) both exports and imports growth dynamics are mainly driven by the intensive margin; vi) at a firm-level, there was a slight reduction of the average number of products, destination countries and varieties on exports, and a larger drop on the number of products in comparison to the drop on the number of countries and varieties on imports. Furthermore, the authors show the unit values of manufacturing firms–as a proxy of the unit cost–and show that, while exporter firms didn't exhibit any change, importers showed a significant increase.

For their part, Ricardo Chavarín, Ricardo Gómez, and Alfredo Salgado from Banco de México, seek to identify the contribution of domestic and foreign supply and demand shocks on the monthly variation of Mexican economic activity at the aggregate level and study their heterogeneous effects at a sectoral level during the COVID-19 pandemic using a sign-restricted SBVAR model in An Analysis of Sectoral Supply and Demand Shocks in Mexico During COVID-19. Based on a historical decomposition analysis, the authors find that during the peak of the First Wave of COVID-19 cases in Mexico (between April-May 2020), both domestic and foreign demand shocks account for most of the economic contraction. The most affected sectors were food and accommodation services, transportation and warehousing, and manufacturing. However, after the economic activity showed partial recovery, amidst the Second Wave that took place between December 2020 and the beginning of 2021, the economic activity monthly variation began to decrease–while remaining positive–, largely due to the negative impact of external supply shocks, particularly affecting export-intensive sectors such as agriculture, forestry, fishing and hunting, manufacturing, among others. The authors concluded their presentation by analyzing the dynamics within the manufacturing sector in more detail.

The next presentation was Disruptions in Global Supply Chains and their Effects in Mexico's Regional Gross Output in the Context of the COVID 19 Pandemic. Motivated by the disruptions in global supply chains due to the COVID-19 shock, particularly those affecting imports of intermediate goods (MIG) from China, the United States, and Europe, Jorge Alvarado, Eva González, Cindy Rangel, Leonardo Torre, and Alejandrina Salcedo, from Banco de México study the effects of negative supply shocks on the Mexican economic activity by region and by sector. The authors hypothesize that these effects were heterogeneous, based on how intense the use of MIG by sector is in each region. To this end, the authors estimate MIG by region using regional input-output matrices at the sectoral, regional, and national levels in Mexico. Based on the Ghosh Supply Model3, Alvarado et al. exhibit a relationship between the regional MIG and the Gross Output of each region of Mexico, namely, the North, North-Central, Central, and South. Their findings show that U.S. supply disruptions contributed the most to Mexico's Gross Output contraction, particularly the Northern region's Gross Output was the most affected and the southern region was the least affected. The most affected sectors in the Northern, the Northern-Central, and the Central regions were motor-vehicle manufacturing and manufacturing of transportation equipment, machinery, electronics, and electronic products, while in the Southern region the largest contraction was due to the decrease of imports in the manufacturing sector of petroleum and coal products, chemicals and plastic.

On the last day of the meeting, motivated by the heterogeneous impact of the COVID-19 shock on labor markets and its distinct characteristics in comparison to past recessions, Ángel Luis Gómez from Banco de España, presented Sectoral Reallocation of the Euro Area Employment After the COVID-19 Shock. His work aims to assess the extent and character of the reallocation shock for the euro area and to consider the implications for the labor market outlook and policy responses to the pandemic. With the use of the European Union Labor Force Survey, he documents the following preliminary findings for Germany, France, Italy, and Spain: i) the most affected sectors during the COVID-19 crisis were accommodation and food services, and arts and recreation, in contrast to construction and manufacturing, which showed some of the largest drops during 2008-2019; ii) the most affected sectors during 2008-2013 hardly recovered from it until 2019, iii) both job-to-job intra- and inter-sectoral transitions fell during the 2008-2013 recession, however, the recovery in intra-sectoral transitions compensated the fall in a bigger proportion, iv) after the recession, the majority of the sectors of origin of job-to-job transitions compensated their drop but this was not the case for the sectors of destination of these transitions. Gómez concluded his presentation by discussing the extent to which the employment-retention schemes may decrease the allocative efficiency of the economy if they're kept for an extended period of time and compared the share of employees under job-retention programs across sectors in Germany, France, and Spain.

In Monetary policy in the Dominican Republic during COVID-19, Fadua Camacho, Joel González, Nabil López, and Salomé Pradel aim to explain the set measures used by the Central Bank of the Dominican Republic (CBDR) during the COVID-19 episode and estimate its effects. The CBDR adopted an expansive monetary policy stance to provide liquidity to the financial system and reduce financial costs during the COVID-19 episode. To assess the effects of the conventional and unconventional measures undertaken by the CBDR, the authors use a semi-structural New Keynesian macro model with a financial block4 to account for the effect of unconventional monetary policies that directly affect credit and contribute to aggregate demand. They estimate the model's parameters with quarterly data from 2006-2019 using Bayesian methods and produce impulse response functions to represent the effects and transmission mechanisms of three policy shocks, namely, a monetary policy rate shock, a liquidity shock, and a provision shock. They compute a historical decomposition for the loan rate, credit growth, and output gap to capture the contributions of the policies in these variables, emphasizing the recent COVID-19 episode. Their preliminary results suggest that the monetary special measures reduced financial costs and lowered market interest rates, providing an impulse to credit growth and aggregate demand.

The last presentation given at the meeting was Shadow Interest Rates Estimates for Chile and Peru, by Santiago García-Verdú and José Manuel Sánchez-Martínez. The authors use Lombardi and Zhu's (2018) methodology–based on a dynamic factor model–to estimate the shadow interest rates of Peru and Chile using data on each country's effective lower bounds, their respective yield curves, monetary aggregates, and selected variables of the central banks' balance sheet. The authors' preliminary estimates show that the shadow interest rate has been negative in the periods associated with the global financial crisis and the COVID-19 pandemic crisis for Chile, while for the Peruvian economy it has only been negative since June 2020, coinciding with the periods the ELB was reached for each economy. For both countries, they show that shadow interest rates have a negative relationship with the size of their respective central bank balance sheets, their monetary aggregates, and on the other hand, they show that for the Chilean case it has a positive relationship with the yields of 2-, 5- and 10-year bonds, and that this phenomenon is also reflected for Peru using the yields zero-coupon rates.


July 28, 2021


Opening Remarks
Santiago García-Verdú, Advisor, CEMLA. 

Latin American Fall and Rebound since the COVID-19
Danilo Leiva-León (Banco de España) joint with Luciano Campos (Universidad de Alcalá and RedNIE) and Steven Zapata Álvarez (Ministerio de Hacienda de Colombia)

Impact of Covid-19 restrictions in Costa Rica: a local approach
Esteban Méndez joint with José Pablo Barquero and Carlos Segura-Rodríguez (Banco Central de Costa Rica)

Monetary and Credit Policies of the Banco Central do Brasil after the start of Covid-19 Pandemic: What were the effects on Financial Restrictions and Investment of Brazilian Private Firms?
Fernando N de Oliveira (Banco Central do Brasil)


July 29, 2021

COVID-19 in Uruguay: A survey of policy responses and their impact
Jorge Ponce joint with Agustina Affonso, Elizabeth Bucacos, Patricia Carballo, Cecilia Dassatti and Miguel Mello (Banco Central del Uruguay)

International Sourcing and Producer Prices in Chile micro evidence during COVID-19
Elvira Prades (Banco de España) joint with Jennifer Peña (Banco Central de Chile)

An Analysis of Sectoral Supply and Demand Shocks in Mexico During COVID-19
Alfredo Salgado joint with Ricardo Chavarín and Ricardo Gómez (Banco de México)

Disruptions in Global Supply Chains and their Effects in Mexico's Regional Gross Output in the Context of the COVID 19 Pandemic
Leonardo Torre joint with Jorge Alvarado, Eva González, Cindy Rangel and Alejandrina Salcedo (Banco de México)


July 30, 2021

Sectoral reallocation of employment after the Covid-19 shock
Angel Luis Gómez (Banco de España)

Monetary Policy in the Dominican Republic during COVID-19
Nabil López joint with Fadua Camacho, Joel González and Salomé Pradel (Banco Central de la República Dominicana)

Shadow Interest Rates Estimates for Chile and Peru
Santiago García-Verdú joint with José Manuel Sánchez-Martínez (Banco de México and CEMLA)