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Global models for a global pandemic: the impact of COVID-19 on small euro area economies

Working paper 782
Working Papers
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Published: 28 June 2023

By: Pablo Garcia Pascal Jacquinot Črt Lenarčič Matija Lozej Kostas Mavromatis

We analyse the COVID-19 pandemic shock on small open economies (SOEs) in the euro area in a unified modelling framework: the Euro Area and the Global Economy model. We find strong negative international spillovers affecting each of the modelled SOEs, stemming not only from the rest of the euro area, but also from the United States and the rest of the world. A lower bound on nominal interest rates in the euro area amplifies these spillovers, especially within the euro area. Furthermore, we find some positive spillovers from the fiscal measures implemented in the Euro area to combat the pandemic, including the new Next Generation EU instrument.

Keywords: DSGE Modelling, International Spillovers; Monetary Union; Euro Area; COVID-19
JEL codes C53; E32; E52; F45

Working paper no. 782

782 - Global models for a global pandemic: the impact of COVID-19 on small euro area economies

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Download 782 - Global models for a global pandemic: the impact of COVID-19 on small euro area economies

Research Highlights

  • We analyze the effects of Covid-19 on small economies (SOE) in the Euro Area with a focus on the international spillovers from all regions within and outside the union.
  • We use a multiregional dynamic stochastic general equilibrium model. The model features spillovers from the rest of the Euro Area, the US and the rest of the world.
  • Applying the same model to each country, we find strong negative international spillovers affecting each of the modelled SOEs.
  • Crucially, an effective lower bound constraint on the policy rate in the Euro Area amplifies the negative spillovers.
  • Assessing the efficiency of fiscal measures in the Euro Area in mitigating the effects of the pandemic, we show that SOEs benefit from expansionary fiscal policy in the rest of the Euro Area.

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