Explaining the cross-country differences in the economic fallout during the COVID-19 pandemic crisis

Abstract

This paper investigates the main drivers of the differences in the economic fallout in advanced economies during the COVID-19 crisis. In addition to containment measures, the analysis places emphasis on pre-crisis factors that may have bolstered economic resilience during the health crisis and mitigated the output loss. Also, it assesses the role of discretionary fiscal policy in 2020 in explaining the cross-country variation in the economic fallout by explicitly controlling for the simultaneity of the policy measures and the size of the GDP shock. We find that factors such as social distancing measures and the structure of the economy, which are directly related to the COVID-19 crisis, explain a large part of the asymmetry in output loss in 2020 across countries. Pre-crisis structural and institutional factors also seem to contribute to economic resilience during the current crisis, while stronger discretionary fiscal support in 2020 is associated with lower output loss.