Macroeconomic effects of the Covid-19 supply shock: evidence from a global country sample and a GVAR model

Given that the Global Vector Autoregressive (GVAR) method, proposed by Pesaran et al. (2004), provides a practical approach to model the world economy, we study the effects on the macroeconomic determinants of a large number of economies around the globe exposed to supply shocks associated with the Covid-19 pandemic. We show an occurred absence of exogenous epidemics in the economic discourse, which risks undermining governmental flexibility and long-term planning. The existing analysis employs a compact quarterly model of the world economy to illustrate how supply shocks generated by Covid-19 affect an extended number of both developed and emerging/developing economies, on a cross-section basis (spanning the year 2020). We use interchangeably three potential proxies for the Covid-19 supply shocks: i) total confirmed incidences, ii) death incidences, and iii) the recovered patients. The Worldometers database allows us to extract Covid-19 data, while Datastream takes care for the remaining data coming from a sample of 143 countries. Primary condition for the inclusion of a country in the analysis is to have reported Covid-19 incidence within 2020. The presented GVAR/Covid-19 model will generate findings on the global macroeconomic implications of Covid-19 supply shocks with a demonstrated impact on quarterly real GDP, inflation, money supply and credit conditions, public deficit and interest rates. At the same time, specific robustness tests will follow based on different definitions of the variables under study, as well as on various country regions/groups. The findings demonstrate a widespread lack of attention on the “unforeseen” until now supply shock to fully and correctly assess the consequences upon salient macroeconomic variables. Overall, the findings carry clear implications for the role of epidemic shocks in the real economy. Considering how epidemic shocks also tend to affect the expectations of economic participants, this study is calling into question the absence of epidemics in accounting for forthcoming health-related incidences. In his famous book about the 4th industrial revolution, Professor Klaus Schwab and Executive Chairman of the World Economic Forum raised the alarm for the elevated risk on widespread epidemics expected in the 21st century. Following Schwab’s (2017) early warning, we aspire to increase awareness for policymakers to learn more about those shocks and the ways to cope with them.