Coronavirus Disease 2019 and the Global Economy
One sentence summary: Increases in COVID-19 cases are consistent with negative demand shocks in the global economic activity and negative supply shocks in the global transportation of commodities.
The corresponding academic paper by Hakan Yilmazkuday has been accepted for publication at Transport Policy.
Abstract
Using daily data on the coronavirus disease 2019 (COVID-19) cases from China and the rest of the world, this paper investigates the corresponding effects on the global economic activity. The empirical results based on a structural vector autoregression model using crude oil prices (COP) and the Baltic Exchange Dry Index (BDI) are consistent with increases in COVID-19 cases acting as negative demand shocks in the global economic activity (reflected as reductions in COP) and negative supply shocks in the global transportation of commodities (reflected as increases in BDI). The historical decomposition results further suggest that the effects of COVID-19 cases on COP and BDI have been mostly observed in the early COVID-19 period.
The formal investigation is achieved by using a structural vector autoregression (SVAR) model, where the endogenous variables are selected as weekly percentage changes in daily COP and daily BDI. Since COVID-19 is an exogenous shock (i.e., it is not determined by either COP or BDI), percentage changes in daily COVID-19 cases in China and the rest of the world (ROW) are included as exogenous variables in this framework. Using daily data covering the period between January 28th, 2020 and November 15th, 2021, cumulative impulse responses of COP and BDI are estimated to identify the effects of COVID-19 on the global economy.
The corresponding results suggest that 1% of a weekly increase in daily COVID-19 cases in China results in about 0.02% of a cumulative increase in BDI after one week and about 0.03% of a cumulative increase after three months. Similarly, 1% of a weekly increase in daily COVID-19 cases in ROW results in about 0.05% of a cumulative increase in BDI after one week, although the effects become insignificant in longer horizons. These results are consistent with increases in COVID-19 cases acting as negative supply shocks in the transportation of commodities.
The results also suggest that 1% of a weekly increase in daily COVID-19 cases in China results in about 0.02% of a cumulative reduction in COP, whereas 1% of a weekly increase in daily COVID-19 cases in ROW results in about 0.13% of a cumulative reduction in COP after one week and 0.15% after one month. These results are consistent with a lower global demand (reflected as reductions in COP) following increases in COVID-19 cases. The historical decomposition results suggest that the effects of COVID-19 cases on BDI and COP have mostly been observed in the early COVID-19 period.
The relationship between BDI and COP further suggests that positive BDI shocks result in cumulative reductions in COP in the long run, whereas positive COP shocks result in cumulative increases in BDI both in the short run and the long run that are consistent with a complete pass-through of COP into BDI. It is implied that unexpected BDI increases in the SVAR model mostly capture negative supply shocks in the global transportation of commodities, because an increase in BDI results in a reduction of the demand for crude oil, which is a cost factor in the transportation sector. This result is supported by the Joint Open Letter to United Nations agencies from the global maritime transport industry on March 19th, 2020, where the global maritime transport industry has requested certain exemptions for international seafarers as the national regulations disrupt the supply of transportation.