From the 2008-2009 Financial Crisis to the COVID-19 Pandemic: Challenges and the Way Forward

Abstract

I discuss some of the challenges and possible responses of the economics and finance profession following the 2008-2009 financial crisis and the COVID-19 pandemic. I do this in the context of three examples. The first example draws on the Bank of England’s forward guidance on interest rates by flagging differences between real-time and revised data. The second example considers the ability of financial factors to explain UK GDP movements conditional on COVID-19 related information. In this example, I estimate that social distancing and lockdown restrictions reduced, on average, annual UK growth by 9.7 percentage points compared to the scenario of no government action. At the other extreme, had government stringency remained at its April 2020 ‘lockdown level’ throughout the pandemic, annual UK growth would have been lower by (a further) 1.9 percentage points on average compared to the impact of the imposed restrictions. I also estimate that social distancing and lockdown restrictions reduced, on average, annual CPI inflation by 0.9 percentage points compared to the scenario of no government action. At the other extreme, had government stringency remained at its April 2020 ‘lockdown level’ throughout the pandemic, annual CPI inflation would have been lower by (a further) 0.10 percentage points on average compared to the impact of the imposed restrictions. The economic impact of the continuous strict lockdown scenario is slightly worse than what actual lockdown policies deliver which arguably shows the ability of the economy to adjust and get on during lockdown restrictions. The third example refers to Google mobility data and their potential use towards explaining UK GDP.

Keywords: Financial crisis, Divisia money, COVID-19 pandemic, Stringency index, Vaccine hesitancy

JEL Classification: C5, E4, G1