I need a dollar, dollar, a dollar is what I need

Ambrogio Cesa-Bianchi and Fernando Eguren-Martin


In March 2020, the Covid-19 (Covid) outbreak turned the world upside down. With economies virtually shut, financial markets were an exception and remained open. However, it was not business as usual for them: the increased need to meet immediate obligations, and a more generalised increase in risk aversion, led investors to liquidate positions in favour of hard old cash. In a recent Staff Working Paper we pose that investors did not seek any type of cash but rather that the world witnessed a ‘dash for dollars’. We show that the resulting race for dollars went beyond exchange rate markets and led to selling pressure on dollar bonds in corporate bond markets, which experienced particularly large increases in spreads.

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Does corporate leverage amplify economic downturns? A dive into the literature

Sudipto Karmakar, Alexandra Varadi and Sarah Venables

This post reviews the literature on the consequences of debt for corporate and macroeconomic outcomes, drawing both on the pandemic period and on previous financial crises. Lessons from previous crises show that high leverage can amplify corporate risks and economic downturns by: increasing reliance on external financing that may dry up in stress; through debt overhang problems; or by increasing linkages between corporates and other sectors of the economy. Corporate debt may also be correlated with negative outcomes in the pandemic as well, but it is still early to draw direct conclusions.

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What do two million accounts tell us about the impact of Covid-19 on small businesses?

James Hurley, Sudipto Karmakar, Elena Markoska, Eryk Walczak and Danny Walker

Compass on old map

This post is the second of a series of posts about the Covid-19 pandemic and its impact on business activity.

Covid-19 led to a sharp reduction in economic activity in the UK. As the shock was playing out, small and medium-sized businesses (SMEs) were expected to be more exposed than larger businesses. But until now, we have not had the data to analyse the impact on SMEs. In a recent Staff Working Paper we use a new data set containing monthly information on the current accounts of two million UK SMEs. We show that the average SME saw a very large drop in turnover growth and that the crisis played out very differently for different types of SMEs. The youngest SMEs in consumer-facing sectors in Scotland and London were hit hardest.

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Covid-19 briefing: working from home and worker productivity

John Lewis, Andrea Šiško and Misa Tanaka

The Covid pandemic has led to a large enforced shift towards working from home (WFH) as a result of ‘stay-at-home’ policies in many countries. This led to a resurgence in interest in, and new reignited discussion about, the consequences of greater WFH. In this briefing we review the literature on the impact of WFH on productivity. Across a very diverse literature the key lessons are: impacts depend on the nature of tasks, the share of WFH matters, and there is big difference between enforced versus voluntary WFH. And the caveats are important too: cost savings at the firm level don’t automatically translate into economy-wide productivity gains and evidence on long-run effects remains very scarce.

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Covid-19 briefing: pandemics, natural disasters and banks’ balance sheets

Neeltje van Horen

The Covid-19 (Covid) pandemic is a major shock to the economy but unlike traditional crises or credit crunches, its origin is exogenous to the financial sector. The economy’s ability to recover from the impact of the pandemic will however depend in part on the availability of credit. This raises the question how banks absorb a large shock which originates from outside the financial sector. To answer this question this post reviews the literature on how previous pandemics and natural disasters in the developed world affected banks’ balance sheets. One key message stands out: banks that are more rooted in their market are much more likely to continue lending when faced with the economic fallout from such shock.

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Capital flights during Covid-19

Fernando Eguren-Martin, Cian O’Neill, Andrej Sokol and Lukas von dem Berge

While planes were grounded, capital flew out of emerging market economies in response to the acceleration in the spread of the virus in the early stages of the Covid-19 pandemic. Was this capital flight predictable once you account for the sudden deterioration in the global financial environment? In this post we present a model that helps to think about how financial conditions and international capital flows are linked. We then apply this methodology to events observed between March and May 2020, and find that the model predicted a large increase in the likelihood of capital flight. However, the scale of outflows was abnormally large even once the sharp tightening in financial conditions is accounted for.

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Covid-19 briefing: extensions to the SIR model

John Lewis

The SIR model, first developed by Kermack and McKendrick (1927), remains the canonical epidemiological model. It a natural choice for economists seeking to model the interplay between economic and epidemiological dynamics. This briefing surveys some of the many adaptations to the basic SIR setup which have emerged in the epi-macro literature over the past six months. These have all been used to analyse issues such as lockdown policies, super-spreaders, herd immunity, hospital capacity and ‘test- and-trace’.

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When bigger isn’t better: UK firms’ equity price performance during the Covid-19 pandemic

Tommaso Aquilante, David Bholat, Andreas Joseph, Riccardo M Masolo, Tim Munday and David van Dijcke

Background

Covid-19 (Covid) has had heterogeneous effects on different groups of people. For example, it’s had larger negative impacts on contact-intense occupations (Leibovici, Santacreu and Famiglietti (2020)), low wage earners (Joyce and Xu (2020)) and low-income households (Surico, Känzig and Hacioglu (2020) and Chetty et al (2020)). In this blog, we show that UK listed firms have been heterogeneously impacted too (compare Hassan et al (2020); Griffith, Levell and Stroud (2020)). Surprisingly, small firms’ stock prices have been more resilient on average. Or, to put it differently, being bigger hasn’t been better for firms during the pandemic. However, being big with a modern tilt towards intangibles turned out to be beneficial too.

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Covid-19 briefing: monetary policy strategy post-Covid

Richard Harrison, Kate Reinold and Rana Sajedi

The Covid shock has created substantial and unprecedented challenges for monetary policymakers. This post summarises the key literature on the immediate monetary policy response to the shock, including both tools and short to medium-term strategy issues (but leaving aside the longer-term question of fiscal-monetary interactions).

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Covid-19 briefing: Covid-19 crisis, climate change and green recovery

Misa Tanaka

The Coronavirus pandemic and measures to contain contagion had far reaching consequences on economic activities, which also led to a sharp fall in CO2 emissions. This has sparked new debate about how the recovery from the crisis could be made compatible with the Paris climate goals. In this post, I survey the emerging literature on the link between the economic recovery from the aftermath of the pandemic and climate change.

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