Accessible Version
Modeling the Global Effects of the COVID-19 Sudden Stop in Capital Flows, Accessible Data
Figure 1. The sudden stop occurred along with depreciation and financial stress in EMEs
EME 5-Year BBB Corporate Spread: bps
EME Real Exchange Rate Index v. Dollar: Feb 2020=100
The top panel shows the EME 5-Year BBB Corporate Spread in the data, as well as in the two model simulations (“outflow unwinds” and “outflow persists”). In the data, the spread rises by nearly 300 bps in the final part of the sample, from 200 bps to nearly 500 bps. The two model simulations match this increase. In the “outflow unwinds” simulation, the corporate spread starts declining immediately from its peak, while in the “outflow unwinds” simulation it remains elevated for about a year before declining.
The bottom panel shows the EME real exchange rate index against the dollar in the data, as well as in the two model simulations (“outflow unwinds” and “outflow persists”). In the data, EME currencies depreciate substantially against the dollar at the end of the sample. The model simulations also predict a sharp EME depreciation, somewhat larger in magnitude than in the data. In the “outflow unwinds” simulation, EME currencies begin to gradually appreciate after their sharp depreciation. In the “outflow persists” simulation, EME currencies continue to depreciate for about a year before they begin to gradually appreciate.
Notes: The spread shown in the top panel is measured as the difference in yields between five-year BBB corporate bonds and government bonds of the same maturity. It includes bonds issued by a broad set of both Asian (including China) and Latin American EMEs. The bottom panel shows the Federal Reserve Board's dollar index against EME currencies.
Sources: ICE Data Indices, LLC, used with permission; Board of Governors of the Federal Reserve System; authors' calculations.
Figure 2. Large drops in EME output follow the sudden stop
Table A. Outflow unwinds
% dev. from baseline
| Quarter | Output | Investment | Consumption | Exports | Imports |
|---|---|---|---|---|---|
| 2020:Q1 | 0 | 0 | 0 | 0 | 0 |
| 2020:Q2 | -1.83 | -13.88 | -1.11 | 0.93 | -7.00 |
| 2020:Q3 | -2.92 | -22.51 | -1.92 | 1.85 | -11.70 |
| 2020:Q4 | -3.47 | -27.16 | -2.51 | 2.71 | -14.68 |
| 2021:Q1 | -3.63 | -28.89 | -2.95 | 3.50 | -16.38 |
| 2021:Q2 | -3.53 | -28.55 | -3.27 | 4.20 | -17.16 |
| 2021:Q3 | -3.26 | -26.84 | -3.52 | 4.81 | -17.29 |
| 2021:Q4 | -2.90 | -24.27 | -3.71 | 5.32 | -16.97 |
| 2022:Q1 | -2.50 | -21.26 | -3.85 | 5.74 | -16.38 |
| 2022:Q2 | -2.09 | -18.09 | -3.96 | 6.07 | -15.61 |
| 2022:Q3 | -1.71 | -14.98 | -4.04 | 6.31 | -14.76 |
| 2022:Q4 | -1.37 | -12.06 | -4.10 | 6.48 | -13.88 |
| 2023:Q1 | -1.07 | -9.42 | -4.13 | 6.58 | -13.01 |
| 2023:Q2 | -0.81 | -7.09 | -4.15 | 6.63 | -12.19 |
| 2023:Q3 | -0.61 | -5.10 | -4.15 | 6.62 | -11.42 |
| 2023:Q4 | -0.45 | -3.43 | -4.14 | 6.57 | -10.70 |
| 2024:Q1 | -0.32 | -2.07 | -4.11 | 6.48 | -10.05 |
| 2024:Q2 | -0.23 | -0.99 | -4.07 | 6.36 | -9.46 |
| 2024:Q3 | -0.17 | -0.15 | -4.01 | 6.22 | -8.92 |
| 2024:Q4 | -0.13 | 0.48 | -3.94 | 6.06 | -8.44 |
| 2025:Q1 | -0.11 | 0.93 | -3.86 | 5.88 | -8.00 |
Table B. Outflow persists
% dev. from baseline
| Quarter | Output | Investment | Consumption | Exports | Imports |
|---|---|---|---|---|---|
| 2020:Q1 | 0 | 0 | 0 | 0 | 0 |
| 2020:Q2 | -1.91 | -14.32 | -1.31 | 1.12 | -7.64 |
| 2020:Q3 | -3.50 | -26.70 | -2.60 | 2.49 | -14.68 |
| 2020:Q4 | -4.70 | -36.30 | -3.79 | 3.98 | -20.68 |
| 2021:Q1 | -5.45 | -42.68 | -4.83 | 5.52 | -25.35 |
| 2021:Q2 | -5.75 | -45.71 | -5.69 | 6.99 | -28.55 |
| 2021:Q3 | -5.62 | -45.48 | -6.35 | 8.31 | -30.20 |
| 2021:Q4 | -5.23 | -43.03 | -6.85 | 9.47 | -30.75 |
| 2022:Q1 | -4.68 | -39.22 | -7.23 | 10.47 | -30.54 |
| 2022:Q2 | -4.06 | -34.67 | -7.53 | 11.31 | -29.82 |
| 2022:Q3 | -3.43 | -29.83 | -7.77 | 11.99 | -28.80 |
| 2022:Q4 | -2.83 | -25.05 | -7.95 | 12.53 | -27.61 |
| 2023:Q1 | -2.29 | -20.55 | -8.09 | 12.93 | -26.34 |
| 2023:Q2 | -1.81 | -16.45 | -8.19 | 13.22 | -25.07 |
| 2023:Q3 | -1.41 | -12.83 | -8.25 | 13.40 | -23.84 |
| 2023:Q4 | -1.09 | -9.72 | -8.29 | 13.50 | -22.68 |
| 2024:Q1 | -0.83 | -7.12 | -8.29 | 13.51 | -21.60 |
| 2024:Q2 | -0.63 | -4.98 | -8.27 | 13.46 | -20.61 |
| 2024:Q3 | -0.49 | -3.28 | -8.22 | 13.35 | -19.70 |
| 2024:Q4 | -0.39 | -1.95 | -8.15 | 13.19 | -18.87 |
| 2025:Q1 | -0.33 | -0.96 | -8.06 | 13.00 | -18.11 |
Source: Authors' calculations.
Figure 3. Domestic focus of policy proves valuable in weathering the effects of the shock
Table A. Outflow unwinds: Domestically-oriented monetary policy
% dev. from baseline and ann. b.p. dev. from baseline
| Quarter | Output | Policy Rate | Real exchange rate | Currency Premium | Credit Spread |
|---|---|---|---|---|---|
| 2020:Q1 | 0 | 0 | 0 | 0 | 0 |
| 2020:Q2 | -1.83 | -15.13 | 16.11 | 885.39 | 291.95 |
| 2020:Q3 | -2.92 | -32.82 | 14.27 | 752.57 | 223.41 |
| 2020:Q4 | -3.47 | -48.10 | 12.68 | 637.27 | 167.58 |
| 2021:Q1 | -3.63 | -58.92 | 11.29 | 538.72 | 122.72 |
| 2021:Q2 | -3.53 | -64.65 | 10.08 | 455.64 | 87.21 |
| 2021:Q3 | -3.26 | -65.45 | 9.02 | 386.48 | 59.50 |
| 2021:Q4 | -2.90 | -61.95 | 8.10 | 329.59 | 38.25 |
| 2022:Q1 | -2.50 | -54.99 | 7.29 | 283.28 | 22.23 |
| 2022:Q2 | -2.09 | -45.50 | 6.59 | 245.98 | 10.43 |
| 2022:Q3 | -1.71 | -34.34 | 5.97 | 216.20 | 1.94 |
| 2022:Q4 | -1.37 | -22.32 | 5.44 | 192.63 | -3.96 |
| 2023:Q1 | -1.07 | -10.08 | 4.97 | 174.11 | -7.88 |
| 2023:Q2 | -0.81 | 1.82 | 4.57 | 159.62 | -10.31 |
| 2023:Q3 | -0.61 | 13.00 | 4.21 | 148.33 | -11.65 |
| 2023:Q4 | -0.45 | 23.17 | 3.90 | 139.52 | -12.21 |
| 2024:Q1 | -0.32 | 32.16 | 3.62 | 132.61 | -12.23 |
| 2024:Q2 | -0.23 | 39.89 | 3.38 | 127.14 | -11.89 |
| 2024:Q3 | -0.17 | 46.33 | 3.17 | 122.73 | -11.32 |
| 2024:Q4 | -0.13 | 51.54 | 2.98 | 119.09 | -10.64 |
| 2025:Q1 | -0.11 | 55.58 | 2.81 | 115.98 | -9.90 |
Table B. Outflow unwinds: No rate cuts for a year
% dev. from baseline and ann. b.p. dev. from baseline
| Quarter | Output | Policy Rate | Real exchange rate | Currency Premium | Credit Spread |
|---|---|---|---|---|---|
| 2020:Q1 | 0 | 0 | 0 | 0 | 0 |
| 2020:Q2 | -2.38 | -0.55 | 15.44 | 981.15 | 324.95 |
| 2020:Q3 | -4.46 | 0.33 | 12.79 | 937.14 | 284.03 |
| 2020:Q4 | -6.07 | -0.83 | 10.55 | 855.15 | 235.00 |
| 2021:Q1 | -7.28 | -1.51 | 8.54 | 776.50 | 192.22 |
| 2021:Q2 | -7.78 | -9.18 | 7.20 | 636.10 | 132.85 |
| 2021:Q3 | -7.77 | -17.49 | 6.12 | 519.35 | 86.88 |
| 2021:Q4 | -7.42 | -23.58 | 5.23 | 423.64 | 52.00 |
| 2022:Q1 | -6.87 | -26.29 | 4.51 | 346.25 | 26.17 |
| 2022:Q2 | -6.20 | -25.44 | 3.91 | 284.54 | 7.59 |
| 2022:Q3 | -5.49 | -21.38 | 3.42 | 236.02 | -5.26 |
| 2022:Q4 | -4.78 | -14.71 | 3.01 | 198.43 | -13.68 |
| 2023:Q1 | -4.12 | -6.18 | 2.68 | 169.75 | -18.73 |
| 2023:Q2 | -3.51 | 3.49 | 2.40 | 148.24 | -21.28 |
| 2023:Q3 | -2.97 | 13.65 | 2.17 | 132.39 | -22.03 |
| 2023:Q4 | -2.51 | 23.75 | 1.98 | 120.93 | -21.54 |
| 2024:Q1 | -2.12 | 33.36 | 1.83 | 112.81 | -20.23 |
| 2024:Q2 | -1.79 | 42.16 | 1.70 | 107.18 | -18.43 |
| 2024:Q3 | -1.52 | 49.94 | 1.59 | 103.35 | -16.38 |
| 2024:Q4 | -1.30 | 56.58 | 1.51 | 100.79 | -14.24 |
| 2025:Q1 | -1.13 | 62.04 | 1.43 | 99.08 | -12.15 |
Source: Authors' calculations.
Figure 4. Financial stresses in EMEs spill back to the U.S. economy through trade and financial channels
% dev. from baseline
| Quarter | U.S. GDP Outflows Unwinds: Trade Channel | U.S. GDP Outflows Unwinds: Financial Channel | U.S. GDP Outflows Persists: Trade Channel | U.S. GDP Outflows Persists: Financial Channel |
|---|---|---|---|---|
| 2020:Q1 | 0 | 0 | 0 | 0 |
| 2020:Q2 | -0.28 | -0.52 | -0.30 | -0.52 |
| 2020:Q3 | -0.42 | -0.83 | -0.54 | -0.96 |
| 2020:Q4 | -0.48 | -0.98 | -0.70 | -1.29 |
| 2021:Q1 | -0.48 | -1.02 | -0.79 | -1.50 |
| 2021:Q2 | -0.43 | -0.99 | -0.80 | -1.59 |
| 2021:Q3 | -0.37 | -0.91 | -0.75 | -1.55 |
| 2021:Q4 | -0.31 | -0.81 | -0.66 | -1.44 |
| 2022:Q1 | -0.24 | -0.70 | -0.56 | -1.29 |
| 2022:Q2 | -0.18 | -0.58 | -0.45 | -1.12 |
| 2022:Q3 | -0.12 | -0.47 | -0.35 | -0.94 |
| 2022:Q4 | -0.08 | -0.38 | -0.26 | -0.78 |
| 2023:Q1 | -0.04 | -0.29 | -0.18 | -0.63 |
| 2023:Q2 | -0.01 | -0.22 | -0.12 | -0.49 |
| 2023:Q3 | 0.01 | -0.16 | -0.07 | -0.38 |
| 2023:Q4 | 0.02 | -0.12 | -0.03 | -0.29 |
| 2024:Q1 | 0.03 | -0.08 | -0.01 | -0.22 |
| 2024:Q2 | 0.04 | -0.06 | 0.01 | -0.16 |
| 2024:Q3 | 0.04 | -0.04 | 0.02 | -0.12 |
| 2024:Q4 | 0.04 | -0.03 | 0.03 | -0.09 |
| 2025:Q1 | 0.04 | -0.02 | 0.03 | -0.07 |
Source: Authors' calculations.