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2021 | Book

Macroeconomic Responses to the COVID-19 Pandemic

Policies from Southeast Europe


About this book

This book examines economic policies utilized within Southeast Europe in response to the COVID-19 pandemic. Covering countries both within and outside the European Union, the human and economic cost of the pandemic is calculated using macroeconomic models from a short and longer term perspective. The economic policies used during the pandemic are analyzed, alongside crisis management approaches, to highlight the effectiveness of monetary policy, fiscal policies and potential future economic solutions for the post COVID-19 period.

This book aims to provide policy recommendations based on findings from Southeast Europe. It is relevant to researchers and policymakers involved in economic policy and the political economy, as well as anyone interested in the responses to the COVID-19 pandemic.

Table of Contents


Macro Economics of COVID-19

Chapter 1. Current and Long-Run Challenges for the Croatian Economy, in Comparison
Croatia has to overcome the longer-term challenges of the COVID-19 crisis, demographic decline, the functional specialization trap, as well as the digital and automation lag. Here, we analyze the economic development problems, as well as the challenges, in comparison with the country’s peers in Central, East, and Southeast Europe. We offer related policy recommendations, which should have the potential to generate directly or indirectly public and private, domestic and foreign investment. These policies include the introduction of centralized wage bargaining, fiscal devaluations, an improvement of absorption capacities of EU transfers, the accession to the Euro and Schengen area, support for the Western Balkans’ European integration process, improvements in the agricultural system and the industrial base, expansion of the fiscal space via the introduction of taxes for the rich, and import saving investment in human capital, housing, and green public transport for a better life for the younger generation.
Mario Holzner
Chapter 2. COVID-19 Contagion Among Countries
The study analyzes differences in causes of COVID-19 contagion among 43 major countries in the world in November 2020 based on their economic, demographic, geostrategic, and political characteristics. The most significant common factor appears to be the intensity of interpersonal relations which is higher in more developed countries and thus defines COVID-19 as a disease of the rich. The proposed formal model defines the tipping point for lockdown when daily human losses (number of COVID deceased times costs the value of human being) exceeds economic losses (lost GDP). The estimated difference in COVID contagion of the individual country from the general rule as estimated by regression for 43 countries identifies measures to be undertaken to improve the country’s COVID situation.
Franjo Štiblar
Chapter 3. Short-Term Impact of COVID-19 in the Clusters of EU Market Economies
Before the coronavirus epidemic and the related lockdowns, the EU countries represented various image of social, fiscal and external economic characteristics which is the base of the cluster analysis. The puzzle is whether the pre-crisis preparedness results in different or similar damages during the economic crisis. Specific evolution patterns of production, labour market, mobility and risk premium are explored as crisis indicators. The analysis concludes that a clear link can be established merely between the state of public finances and the indicator of financial risk in the examination of the behaviour of clusters. For all clusters, it is confirmed that the decline in mobility was mostly accompanied by a slowdown in industrial production, but not by unemployment.
Vivien Czeczeli, Pál Péter Kolozsi, Gábor Kutasi, Ádám Marton
Chapter 4. Macro Economic Model of COVID-19 Pandemic Crisis
The economic crisis triggered by the COVID-19 virus is unique in economic history in its mode and rate of occurrence, global coverage, and consequences. The text reveals the mechanisms of the impact of health shock on the economy and the macroeconomic framework of mitigating and exiting the crisis. It uses the AS-AD macroeconomic model with vertical axis inflation for analysis. Empirical facts illustrate the case of the Republic of Croatia.
Vladimir Čavrak

Economics Policies during COVID-19

Chapter 5. Central Bank’s Balance Sheet Management in Times of Systemic Crises
The central bank’s balance sheet has become the main instrument of monetary policy in the aftermath of the GFC and the COVID-19 health crisis. Hence, the aim of this paper is to analyze changes in the balance sheets’ sizes and channels of base money creation in groups of countries, taking note of differences between them. In doing so, authors compare size and structure of the selected central banks’ balance sheets: (a) USA, Japan, the Euro area and the UK, (b) EU member states that have adopted the euro and (c) EU member states that have retained their currency. In the highly developed countries, government securities have become the largest asset in the central bank balance sheet, representing the dominant channel for creating base money. We discuss that this is a structural trend and could be regarded as a contemporary (public) debt monetization on a historical level. On the other hand, developing countries made little use of unconventional monetary policy in the past decade and foreign exchange transactions remained the most important channel for base money creation. Early reaction to the COVID-19 recession could prove to be a catalyst for a change among developing countries. However, the strong and rapid growth of central banks’ balance sheets now raises the question of sustainability and negative spillovers.
Ivan Lovrinović, Martina Solenički, Karlo Vujeva
Chapter 6. Quantitative Easing, Stock Exchange, Inflation and Monetary Paradigm in the US: Lessons for Emerging Economies
The aim of this study is to analyze the role and explain the relationship between quantitative easing (and) the US stock market growth 1870–2020. We use spectral analysis and spectral Granger causality to explore the link. Empirical results show a high degree of coherence between quantitative easing and US stock market growth (R2 = 0.80). Spectral Granger causality test results validate results rejecting the null of no Granger causality. We test robustness results using Markov switching time-varying model 2003q1–2020q4. Markov switching model isolates two clear regimes. One with the rapidly expanding FED balance sheet (quantitative easing) and second, zero (or no) quantitative easing. Two regimes perfectly fit the data for 2003q1–2020q4 and quantitative easing episodes. To check for the US stock market link, we use S&P 500 price index as a quantitative easing predictor. Using the index gives us high precision in predicting quantitative easing episodes proving US stock market growth is the final target of the quantitative easing schemes.
Marinko Škare, Dean Sinković
Chapter 7. Monetary Policy in Croatia During Two Recessions
The paper compares the monetary policy in Croatia during two crises: the great recession and the COVID pandemic. The great recession was a global financial shock that strongly affected Croatia. During the great recession, the central bank was focused on exchange rate stability with little regard for the economy and the effect of the restrictive monetary policy on the real economy. The COVID pandemic was global, but the effects of the crisis are particular, depending on the structure of the economy and measures taken to suppress the pandemic. During the COVID crisis, CNB introduced a new monetary transaction and was able to preserve both liquidity in the economy and exchange rate stability. The paper also proposes further policies to strengthen the quality and inclusiveness of monetary policy in Croatia.
Neven Vidaković
Chapter 8. Monetary Transmission in Croatia: A View from the Eurozone’s “Waiting Room”
The Republic of Croatia, as a member of the European Union, is preparing for the adoption of the euro as a national currency and is currently in the so-called Eurozone’s “waiting room”. Usually, before the accession of some EU member state to the European Economic and Monetary Union (EMU), the analysis of the monetary transmission mechanism is performed in order to examine the compliance and readiness of the country for the common monetary policy. For the sake of the analysis, the vector autoregressive (VAR) model is applied. Results indicate relatively strong significance of the bank interest rate in terms of its impact on other variables, i.e., the real gross domestic product, prices, money supply and the real effective domestic exchange rate. As well, the results indicate that the bank interest rate is an exogenous variable that is not affected by other domestic variables.
Manuel Benazić, Dean Učkar
Chapter 9. Monetary and Fiscal Policy Response During COVID-19 Crisis in Bosnia and Herzegovina: Constraints and Potentials
Bosnia and Herzegovina (BiH), as a small open economy, does not have adequate monetary and fiscal policy capacity to react during crisis. With a currency board as a monetary regime there is almost no room for monetary policy intervention. However, there are potentials in the financial system, which are not used due to undeveloped financial infrastructure. Limitations in monetary policy put additional pressure on fiscal policy, but current complex constitutional and institutional structure results in high and inefficient public spending. With an introduction of fiscal discipline measures, and the development of financial infrastructure, BiH could be better prepared to react to crisis and accelerate development. In this paper we examine constraints and potentials of both monetary and fiscal policy response during COVID-19 crisis in BiH.
Sead Kreso, Lejla Lazović-Pita, Selena Duraković

Broader Impact of COVID-19

Chapter 10. Emergency Financial Mismanagement in Croatia During COVID-19 Crises
The ongoing crisis caused by the COVID-19 global pandemics has serious economic repercussions for the Republic of Croatia. Economic consequences of the current crisis are indicating the need for developing a strategic approach to emergency financial management. The response of Croatian authorities in current crisis showed a focus on short-term financial assistance instead of creating and implementing a comprehensive long-term recovery strategy. Inefficient emergency financial management in Croatia is a result of non-systematic development caused by combination of different factors analyzed in this chapter.
Robert Barić
Chapter 11. Modern Monetary Theory and COVID-19 Crisis
Modern Monetary Theory (MMT) is part of post-Keynesian economics that summarize the money creation process as “loans create deposits” (banks) and “deposits create reserves” (central bank). MMT is distinguished from other approaches to macroeconomics because it synthesizes several traditions from heterodox economics focusing on describing monetary and fiscal operations in nations that issue a sovereign currency. The shift in interest pre-dates the COVID-19 crisis, but the virus has given MMT a huge boost—the world is on a crossroad that leads to a conclusion that exit strategy to the new global economics system is to be based on MMT.
Tihomir Domazet
Chapter 12. Impact of COVID-19 on Working from Home in Serbia: Possibilities and Consequences
Working from home has a long tradition. However, the pandemic has significantly affected the growth of the number of employees working from home. Besides the increased number of freelancers, the pandemic also affected companies that worked in the traditional way to opt for remote working. This way of working has enabled the continuity of work of many companies. It has also changed the way we work, opened new possibilities, but created negative consequences as well. The aim of our research is to examine how the pandemic affected the organizations’ activities in Serbia and the scope of their business, as well as how it affected employees who work from home and remotely. The results of our research also show that remote working leads to more frequent health impairments, as a result of insufficient implementation of occupational health preventive measures at work.
Mirjana Radović-Marković, Jovica Jovanović
Macroeconomic Responses to the COVID-19 Pandemic
Neven Vidaković
Ivan Lovrinović
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