Policy Rules and Large Crises in Emerging Markets

RePEc Short ID: pko790
ORCID iD: 0000-0001-8464-2470

Espino, Emilio; Kozlowski, Julian; Martin, Fernando M.; Sanchez, Juan M.

doi:10.20955/wp.2022.018

Working Paper

Policy Rules and Large Crises in Emerging Markets

Abstract: In response to the COVID-19 pandemic, Latin American countries temporarily suspended rules limiting debt, fiscal and monetary policies. Despite this increase in flexibility, the crisis implied a substantial deterioration of macroeconomic variables (e.g., real GDP declined by 9.5%) and high welfare costs (which we estimate as equivalent to a 13% one-time reduction in non-tradable consumption). This paper studies a sovereign default model with fiscal and monetary policies to assess the policy response and evaluate the gains from flexibility in times of severe distress.

Keywords: COVID-19; crises; default; Sovereign debt; Exchange rate; inflation; fiscal policy; emerging markets; Markov equilibrium;

JEL Classification: E52; E62; F34; F41; G15;

https://doi.org/10.20955/wp.2022.018