Monetary policy and COVID-19

Michal Brzoza-Brzezina, Marcin Kolasa and Krzysztof Makarski

No 2021-067, KAE Working Papers from Warsaw School of Economics, Collegium of Economic Analysis

Abstract: We study the macroeconomic effects of the COVID-19 epidemic in a quantitative dynamic general equilibrium setup with nominal rigidities. We evaluate various containment policies and show that they allow to dramatically reduce the welfare cost of the disease. Then we investigate the role that monetary policy, in its capacity to manage aggregate demand, should play during the epidemic. We show that treating the observed output contraction as a standard recession leads to a bad policy, irrespective of the underlying containment measures. Then we check how monetary policy should solve the trade-off between stabilizing the economy and containing the epidemic. If no administrative restrictions are in place, the second motive prevails and, in spite of the deep recession, optimal monetary policy is in fact contractionary. Only if sufficient containment measures are being introduced should central bank interventions be expansionary and help stabilize economic activity.

Keywords: COVID-19; Epidemics; Containment measures; Monetary policy (search for similar items in EconPapers)
JEL-codes: E1 E5 E6 H5 I1 I3 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2021-07
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cwa, nep-dge, nep-isf, nep-mac and nep-mon
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Citations: View citations in EconPapers (3)

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http://hdl.handle.net/20.500.12182/1124 (application/pdf)

Related works:
Journal Article: Monetary Policy and COVID-19 (2022)
Working Paper: Monetary Policy and COVID-19 (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:sgh:kaewps:2021067

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