Fiscal Policy in the Age of COVID: Does it ‘Get in all of the Cracks?’

Abstract

We study the effects of fiscal policy in response to the COVID-19 pandemic at the firm, sector, country and global level. First, we estimate the impact of COVID-19 and policy responses on small and medium sized enterprise (SME) business failures. We combine firm-level financial data from 50 sectors in 27 countries, a detailed I-O network, real-time data on lockdown policies and mobility patterns, and a rich model of firm behavior that allows for several dimensions of heterogeneity. We find: (a) Absent government support, the failure rate of SMEs would have increased by 9 percentage points, significantly more so in emerging market economies (EMs). With policy support it only increased by 4.3 percentage points, and even decreased in advanced economies (AEs). (b) Fiscal policy was poorly targeted: most of the funds disbursed went to firms who did not need it. (c) Nevertheless, we find little evidence of the policy merely postponing mass business failures or creating many 'zombie' firms: failure rates rise only slightly in 2021 once policy support is removed. Next, we build a tractable global intertemporal general equilibrium I-O model with fiscal policy. We calibrate the model to 64 countries and 36 sectors. We find that: (d) a sizable share of the global economy is demand-constrained under COVID-19, especially so in EMs. (e) Globally, fiscal policy helped offset about 8% of the downturn in COVID, with a low 'traditional' fiscal multiplier. Yet it significantly reduced the share of demand-constrained sectors, preserving employment in these sectors. (f) Fiscal policy exerted small and negative spillovers to output in other countries but positive spillovers on employment. (g) A two-speed recovery would put significant upwards pressure on global interest rates which imposes an additional headwind on the EM recovery.(h) Corporate and sovereign spreads rise when global rates increase, suggesting that EM may face challenging external funding conditions as AEs economies normalize.

Firm-level policy support during the crisis: So far, so good?

“…For each of the four sectors considered separately, the proportion of allotment to smaller companies is higher than for larger companies. This seems to reflect the fact, as discussed above, that the smaller firms have reported higher sales losses (Gourinchas et al, 2021). Smaller firms are positioned to the right of their larger counterparts.…”

“…Although constrained by data availability limitations, early firm-level evidence is positive on the impact of national COVID-19 policy support measures. A selection of model-based simulation exercises have helped to inform policymakers from early on in the pandemic, such as Gourinchas et al (2020Gourinchas et al ( , 2021, Lopez-Garcia (2020), Barnes et al (2021), Blanco et al (2021), Demmou et al (2021a,b), Díez et al (2021), andEbeke et al (2021), Maurin and Pal (2020). These studies have highlighted the potential of support measures to reduce liquidity shortfalls, bankruptcies, as well as output and employment losses relative to a no-policy scenario.…”

Global Supply Chain Pressures, International Trade, and Inflation

“…6 See Krugman's New York Times article for a similar argument (https://www.nytimes.com/2022/01/21/opinion/inflation-us-economy-biden.html). Relatedly, Gourinchas et al (2021) estimate a low fiscal (output) multiplier, but a higher 'employment' multiplier of fiscal transfers under supply constraints. Figure 2 shows that the Federal Reserve Bank of New York's global supply chain pressure index (Benigno et al, 2022), which measures a common factor of several crosscountry and global indicators of supply chain pressures (e.g., delays in shipments and delivery times and shipping costs after purging these from demand measured by new orders), moves together with inflation both in the US and in the Euro Area, where both started their ascent in early 2021.…”

Zombie Companies in Business Environment in Emerging Economies: Case of Turkey

“…From a holistic point of view, the economic packages created in the face of COVID-19 in emerging economies increased the borrowing of countries (Gourinchas et al, 2021). When the micro level is reached, the reasons such as the economic crisis environments that the companies are in and the closure of the factories bring the debts of the companies to high levels (Ellul et al, 2020).…”