Public Policy Covid-19 Latin America Exogenous Shocks Business Confidence Spillover Effects Financial Markets

External authors:

• Paula Margaretic ( Universidad de Chile , Universidad de San Andres Argentina )
• Agustin Sotelo ( Universidad de San Andres Argentina )

Abstract:

How do public policy responses to exogenous shocks shape business expectations? We examine this question in the context of the COVID-19 pandemic, focusing on the impact of two broad types of policy responses: containment policies (e.g., lockdowns and mobility restrictions) and restorative policies (e.g., vaccine rollouts). Using monthly panel data from 42 countries-20 of which are emerging economies-for the period from 2018 to 2021, we test the effects of both domestic and neighboring countries' policies on business expectations. We find that containment policies significantly depress expectations, while restorative policies enhance them. These effects are moderated by country-level institutional factors such as government trust, political orientation, and financial capacity. We also uncover positive spillover effects from containment policies in neighboring countries. In particular, Latin American countries demonstrate great sensitivity to both domestic and neighboring countries' policies, with this sensitivity being moderated by their institutional characteristics. By focusing on business expectations as a forward-looking mechanism and highlighting institutional and regional variation in responses, this study contributes to research on resilience during global crises.