Macroeconomic policies and the pandemic-driven recession
Celso Costa Junior,
Alejandro C. Garcia-Cintado and
Karlo Marques
International Review of Economics & Finance, 2021, vol. 72, issue C, 438-465
Abstract:
We build a three-country DSGE model to address the economic fallout from the COVID-19 shock. First, three different scenarios –optimistic, baseline and pessimistic– are drawn where economic authorities are assumed to not react to the disturbance. We find that the pandemic brings about a prolonged economic depression in the latter scenario –the most realistic one–, as GDP and hours worked fall by 20% (from trend) and they never recover their pre-crisis levels over the span of time studied. We then move on to analyze the effectiveness of conventional fiscal and monetary policy tools in curbing the recessionary consequences of the pandemic. The most powerful instruments are government purchases and expansionary monetary policy, although these two measures come with some trade-offs. In addition, we explore how a binding zero lower bound (ZLB) that renders conventional monetary policy ineffective can affect our findings. We show that the lower constraint deepens the recession caused by the pandemic, primarily because the central bank cannot lower the policy rate further, and because fiscal policy tightens in order to ensure government debt sustainability. Naturally, we next ask ourselves what would happen in this context did the monetary authority rely on unconventional monetary policy to try to dampen the recessionary consequences of the pandemic. Our results reveal that quantitative easing (QE) prevents private consumption, inflation, and to a much lesser extent, output from falling as much due to the shock.
Keywords: Pandemic; Taxation; Public spending; Monetary policy; DSGE model; Zero lower bound; Quantitative easing (search for similar items in EconPapers)
JEL-codes: E59 E60 E62 H00 I10 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (11)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:72:y:2021:i:c:p:438-465
DOI: 10.1016/j.iref.2020.12.010
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