Assessing The U.S. Macroeconomic Policy Response To The COVID-19 Recession

Abstract

As the global COVID-19 pandemic swept the globe during 2020 accompanied by government lockdowns and a race to produce a vaccine, tremendous amounts of monetary and fiscal accommodation have been introduced. In comparison with the global financial crisis of 2008-2009, central bank balance sheets are growing much more rapidly with new long-term asset purchases even among emerging market countries. In addition, fiscal policy has been much more accommodative in size compared to the last global recession. This Policy Analysis Exercise (PAE) attempts to take stock of and analyze U.S. economic policy response during the COVID-19 crisis and make further policy recommendations that are amenable to continuing a robust COVID-19 economic recovery and responding to future recessions. One, it finds that quantitative easing announcements had a meaningful impact on reducing Treasury bond yields. Second, it attempts to estimate the fiscal multipliers for stimulus checks and measure the impact of various wage subsidy programs including the Paycheck Protection Program (PPP) in the U.S. and other wage subsidy programs abroad. Specifically, this PAE makes recommendations including the case for more targeted fiscal relief (focused more on wage subsidies), unemployment insurance tied to wage replacement rather than gross dollar amounts, more targeted public investments (while taking advantage of historically low interest rates) and continued monetary accommodation in the form of long-term asset purchases on the part of central banks which all can support a stronger recovery while balancing the risks of inflation and rising public debt. It also makes the case for more efficient forms of taxation when it comes to revenue offsets.

Keywords: Fiscal Policy, Inflation, Unemployment Insurance, Wage Subsidies, Quantitative Easing