Macroeconomic Effects of Covid-19 in a Commodity-Exporting Economy: Evidence from Mongolia

ABSTRACT

This article examines macroeconomic effects and transmission mechanisms of Covid-19 in Mongolia, a developing and commodity-exporting economy, by estimating a Bayesian structural vector autoregression on quarterly data. We find strong cross-border spillover effects of Covid-19 passing through changes in commodity markets and the Chinese economy. Our estimates suggest that China’s GDP and copper price shocks respectively account for three-fifths and one-fifths of the drop in real GDP in 2020Q1. The recovery observed for 2020Q2-2021Q1 is primarily due to positive external shocks. However, disruptions in credit and labor markets have been sustained in the economy. Two-thirds of the fall in employment in 2021Q1 could be attributed to adverse labor demand shocks. We also reveal novel empirical evidence for the balance sheet channel of the exchange rate, the financial accelerator effects, and an indirect channel of wage shock to consumer price passing through bank credit.

JEL:

• Covid-19
• demand and supply shocks
• macroeconomic fluctuations
• structural vector autoregression
• Bayesian analysis

JEL CLASSIFICATIONS:

• C32
• E6
• E17
• E27
• E32
• I15

Acknowledgment

The author would like to thank the editor and two anonymous reviewers for their constructive comments. The opinions expressed herein are those of the author and do not necessarily reflect the official views of Bank of Mongolia.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. Few exceptions include Mihailov (2020) who chooses adverse labor supply shocks in an estimated DSGE model as a proxy for Covid-19 pandemic lockdown, McKibben and Fernando (2020) who use a global hybrid DSGE/CGE general equilibrium model, Barrot, Grassi, and Sauvagnat (2021) and Baqaee and Farhi (2021) who employ quantitative multi-sector models.

2. Our VAR system includes all variables (i.e., external sector, real sector, financial sector, labor market, monetary and fiscal policies) capturing potential transmission channels of Covid-19 in EMDEs. For example, as the Covid-19 pandemic is global in nature, foreign gross domestic product (GDP), consumer price index (CPI), and commodity prices are included to capture the spillover effect of global demand, supply, and terms of trade shocks.

3. In the case of Cholesky factorization (i.e., $\mathbf{D}=I$), the impact period impulse response is given by ${\psi }_0\equiv {\mathbf{A}}^{-1}.$.

4. UMP measures of the BOM have been intended to increase credit supply and reduce lending rates during the credit crunch period rather than responding to financial turbulence. Given a bank-centric financial system, the BOM’s UMP (i.e., large-scale subsidized lending to the real sector through banks) can stimulate the economy by increasing new loans and reducing lending rates.

5. China’s real GDP is calculated as a ratio of seasonally adjusted current price GDP in China (CHNGDPNQDSMEI) to CPI, all items for China, index 2015 = 100 (CHNCPIALLQINMEI), both data are collected from FRED economic data of Federal Reserve Bank of St. Louis.

6. Dieppe, Legrand, and Roye (2018) suggest setting ${\lambda }_1$ for the normal-Wishart prior at a smaller value than for the Minnesota prior to compensate for the lack of extra shrinkage from ${\lambda }_2$, which controls tightness on cross-variable parameters in the case of Minnesota prior. Our choice of ${\lambda }_1=0.1$ is much smaller compared to the value of ${\lambda }_1=0.2$ selected by Sznajderska and Kapuściński (2020) for the Minnesota prior.

7. Labor supply shock is related to the state of the public health crisis: once this pandemic brought under control, negative supply shocks should disappear as workers no longer reluctant to go to work and lock downs are lifted. Demand shocks may be more related to the general state of the economy, while they may also have a public health-related component. The fall in employment and aggregate expenditure that are caused by the demand shock can lead to a reduction in activity that are not explicitly subject to the lockdown. In this case, the reduction in activity can be addressed via targeted stabilization policies such as fiscal or credit policies.

8. Our estimation shows that 1% MNT/RMB depreciation leads to 0.36% increases in CPI after three quarters.