Monetary and Fiscal Policies in the COVID-19 Crisis. Will They Work?

Abstract

The spread and mortality rate of the COVID-19 virus has created enormous strains on global healthcare systems and driven governments to take extreme measures to contain the virus, including the lock down of most citizens and shutting down most economic sectors. Due to these unique challenges and coming from an economy that was weak already in 2018 and 2019, the world faces a global crisis of unprecedented impact and high uncertainty about the recovery process. In this paper, we analyze how the world economy is addressing the COVID-19 pandemic. We start with the situation of the main economic regions at the end of last year to understand the tools available to fight against what could be the worst crisis since World War II, according to the IMF1. Moreover, we review the estimated economic impact of COVID-19, as well as the expected recovery and its time frame. Additionally, we reflect on the fiscal and monetary measures adopted by different countries, especially G7 economies, to tackle the crisis. Finally, we discuss the optimal policies to overcome the situation and advance towards economic recovery and the stabilization of public finances. This crisis is a supply shock added to a forced shutdown of the economy. As such, traditional tools to boost credit demand and usual demand-side policies alone are likely to generate little positive effect, as any aggregate demand that may be incentivized will not likely be followed by aggregate supply. A combination of demand-side and supply-side measures may prove to be more effective to boost the recovery after the pandemic.