The Federal Reserve's Response to the COVID-19 Contraction: An Initial Appraisal

36 Pages Posted: 9 Nov 2020 Last revised: 12 Nov 2020

See all articles by Nicolas Cachanosky

Nicolas Cachanosky

Metropolitan State University of Denver; American Institute for Economic Research

Bryan Cutsinger

Angelo State University - Accounting, Economics and Finance Department; Texas Tech University - Free Market Institute

Thomas L. Hogan

American Institute for Economic Research

William J. Luther

Florida Atlantic University; American Institute for Economic Research

Alexander William Salter

Texas Tech University - Rawls College of Business; American Institute for Economic Research

Date Written: November 6, 2020

Abstract

We provide an initial assessment of the Federal Reserve's policy response to the COVID-19 contraction. We briefly review the historical episode and consider the standard textbook treatment of a pandemic on the macroeconomy. Then, we summarize the monetary and emergency lending policies pursued by the Fed. Finally, we consider the extent to which the Fed might be said to have promoted monetary stability over the period; whether its emergency lending facilities were warranted; and what, if any, consequences are likely to follow from these facilities. In brief, we credit the Fed with promoting monetary stability while maintaining that it could have (and should have) done more. It could have achieved something approximating monetary stability without employing its emergency lending facilities, but some of its facilities were intended to promote general liquidity and likely helped to that end. Other facilities were primarily intended to allocate credit and, thus, blur the line between monetary and fiscal policy. These credit allocation facilities were unwarranted and unwise.

Keywords: COVID-19, credit allocation, Federal Reserve, lending facilities, monetary policy

JEL Classification: E52, E58, P16

Suggested Citation

Cachanosky, Nicolas and Cutsinger, Bryan and Hogan, Thomas L. and Luther, William J. and Salter, Alexander William, The Federal Reserve's Response to the COVID-19 Contraction: An Initial Appraisal (November 6, 2020). AIER Sound Money Project Working Paper No. 2021-01, Available at SSRN: https://ssrn.com/abstract=3726345 or http://dx.doi.org/10.2139/ssrn.3726345

Nicolas Cachanosky

Metropolitan State University of Denver ( email )

Student Success Building
890 Auraria Pkwy #310
Denver, CO 80217
United States

HOME PAGE: http://www.ncachanosky.edu

American Institute for Economic Research

PO Box 1000
Great Barrington, MA 01230
United States

Bryan Cutsinger

Angelo State University - Accounting, Economics and Finance Department ( email )

San Angelo, TX 76909
United States

Texas Tech University - Free Market Institute

Box 45059
Lubbock, TX 79409-5059
United States

Thomas L. Hogan

American Institute for Economic Research ( email )

PO Box 1000
Great Barrington, MA 01230
United States

William J. Luther (Contact Author)

Florida Atlantic University ( email )

777 Glades Road
Boca Raton, FL 33431
United States

HOME PAGE: http://www.wluther.com

American Institute for Economic Research ( email )

PO Box 1000
Great Barrington, MA 01230
United States

HOME PAGE: http://www.aier.org/staff/william-j-luther

Alexander William Salter

Texas Tech University - Rawls College of Business ( email )

Lubbock, TX 79409
United States

HOME PAGE: http://awsalter.com

American Institute for Economic Research

PO Box 1000
Great Barrington, MA 01230
United States

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