Simulating policy responses to multiple economic shocks: An experiment with combined impacts of COVID‐19 and oil price crash on Kuwait

Abstract

Researchers and policy‐makers are used to measuring impacts of an economic shock. However, multiple economic shocks generate disruption that are challenging, not just analytically but also in the interpretations of results (Pagan & Robinson, European Economic Review, 145, 2022, 104120). The disruptions come through multiple channels whose impacts were trickier to measure than emanating from those of a single shock. This study develops and applies a framework to conduct simulation experiments with multiple economic shocks. Kuwaiti data were used to simulate multiple economic shocks to the economy originating from the Corona Pandemic and the collapse of oil price, which simultaneously happened during the first quarter of 2020. As an oil exporting country, Kuwait is used to dealing with recurrent changes in oil prices in the world market as a single shock. However, unlike the oil shock, COVID‐19 has many demand and supply shocks, each with separate transmission channels. The objective here is to quantify relative contributions to overall adverse effects on GDP, and then identify policy instruments required to implement a successful recovery. A recursive dynamic economy‐wide model was formulated and calibrated. The results indicate that the GDP effects range from 35% to 11% declines from the baseline scenario depending on effectiveness of policy responses.