Pandemics and economic turmoil in the short‐run: The role of fiscal space

Abstract

Abstract We estimate, by means of the local projection method, the short to medium‐term economic impact of previous pandemics in a sample of 170 countries during the 2000–2018 period. We find that the output effect has been significant (reaching over −2 percent after 5 years) and persistent. The impact has varied across income groups, with pandemics affecting more developed countries through a big negative impact on investment. Moreover, we explored the relevance of fiscal space in affecting the negative economic impact of pandemics. To this end, we constructed new aggregate fiscal space variables based on a principal component analysis that combined several indicators. Results suggest that the initial fiscal landscape of countries was a key ingredient in softening the economic impact of past pandemics. We believe that this paper's findings are useful to inform policymakers about what can be expected in the new normal that is following the recent COVID‐19 pandemic, particularly in a context of increasingly constrained fiscal space.