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Sebnem Kalemli-Ozcan, Pierre-Olivier Gourinchas, Veronika Penciakova, and Nick Sander
We estimate the impact of the COVID-19 crisis on business failures among small and medium size enterprises (SMEs) in seventeen countries using a large representative firm-level database. We use a simple model of firm cost-minimization and measure each firm’s liquidity shortfall during and after COVID-19. Our framework allows for a rich combination of sectoral and aggregate supply, productivity, and demand shocks. We estimate a large increase in the failure rate of SMEs under COVID-19 of nearly 9 percentage points, ab-sent government support. Accommodation & Food Services, Arts, Entertainment & Recreation, Education, and Other Services are among the most affected sectors. The jobs at risk due to COVID-19 related SME business failures represent 3.1 percent of private sector employment. Despite the large impact on business failures and employment, we estimate only moderate effects on the financial sector: the share of Non Performing Loans on bank balance sheets would increase by up to 11 percentage points, representing 0.3 percent of banks’ assets and resulting in a 0.75 percentage point decline in the common equity Tier-1 capital ratio. We evaluate the cost and effectiveness of various policy interventions. The fiscal cost of an intervention that narrowly targets at risk firms can be modest (0.54% of GDP). However, at a similar level of effectiveness, non-targeted subsidies can be substantially more expensive (1.82% of GDP). Our results have important implications for the severity of the COVID-19 recession, the design of policies, and the speed of the recovery.
Uwe Böwer
State-owned enterprises (SOEs) play an important role in Emerging Europe’s economies, notably in the energy and transport sectors. Based on a new firm-level dataset, this paper reviews the SOE landscape, assesses SOE performance across countries and vis-à-vis private firms, and evaluates recent SOE governance reform experience in 11 Emerging European countries, as well as Sweden as a benchmark. Profitability and efficiency of resource allocation of SOEs lag those of private firms in most sectors, with substantial cross-country variation. Poor SOE performance raises three main risks: large and risky contingent liabilities could stretch public finances; sizeable state ownership of banks coupled with poor governance could threaten financial stability; and negative productivity spillovers could affect the economy at large. SOE governance frameworks are partly weak and should be strengthened along three lines: fleshing out a consistent ownership policy; giving teeth to financial oversight; and making SOE boards more professional.
International Monetary Fund. European Dept.


Economic growth is broadening in Central, Eastern, and Southeastern Europe. Further ahead, however, growth prospects are tested by a dwindling workforce and weak productivity. Reaching Western European income levels would thus take longer, says the IMF in its Regional Economic Issues update on the region.

Mr. Jaromir Benes, Kevin Clinton, Asish George, Joice John, Mr. Ondra Kamenik, Mr. Douglas Laxton, Pratik Mitra, G.V. Nadhanael, Hou Wang, and Fan Zhang
India formally adopted flexible inflation targeting (FIT) in June 2016 to place price stability, defined in terms of a target CPI inflation, as the primary objective of monetary policy. In this context, the paper draws on Indian macroeconomic developments since 2000 and the experience of other countries that adopted FIT to bring out insights on how credible policy with an emphasis on a strong nominal anchor can reduce the impact of supply shocks and improve macroeconomic stability. For illustrating the key issues given the unique structural characteristics of India and the policy options under an FIT framework, the paper describes an analytical framework using the core quarterly projection model (QPM). Simulations of the QPM are carried out to illustrate the monetary policy responses under different types of uncertainty and to bring out the importance of gaining credibility for improving monetary policy efficacy.
Mr. Rudolfs Bems and Robert C. Johnson
We examine the role of cross-border input linkages in governing how international relative price changes influence demand for domestic value added. We define a novel value-added real effective exchange rate (REER), which aggregates bilateral value-added price changes, and link this REER to demand for value added. Input linkages enable countries to gain competitiveness following depreciations by supply chain partners, and hence counterbalance beggar-thy-neighbor effects. Cross-country differences in input linkages also imply that the elasticity of demand for value added is country specific. Using global input-output data, we demonstrate these conceptual insights are quantitatively important and compute historical value-added REERs.
International Monetary Fund. European Dept.


The confluence of multiple adverse shocks—the turbulence in financial markets, high commodity prices, and the appreciation of the exchange rate—have depressed growth in Europe. At the same time commodity prices increases have boosted headline inflation. While containing inflation remains a major concern, supporting the recovery is likely to gain policy prominence in the advanced economies. Looking forward, improvements in prudential regulation could mitigate the procyclicality of credit standards, which should help reduce macroeconomic volatility. Cross-border labor flows are generally seen to have beneficial macroeconomic effects.