The Shifting Roles of Monetary and Fiscal Policy in Light of Covid-19

The Shifting Roles of Monetary and Fiscal Policy in Light of Covid-19. Center for Strategic & International Studies. Jack Caporal, Victoria Meyer. February 23, 2021

The Covid-19 pandemic has drastically affected both the U.S. and the global economy. In February 2020, the U.S. unemployment rate was at near lows of 3.8 percent. By April, it reached 14.7 percent—nearly five percentage points higher than the peak of the Great Recession. While many of these unemployment claims were temporary, the economy is still in distress. In October 2020, 40 U.S. states either added fewer jobs than in August or lost jobs. The U.S. national rate of job growth in September and October was less than half its August rate. By January 2021, the economy had over 9 million fewer jobs than prior to the pandemic. Permanent job losses remained elevated in January at 3.5 million, 2.2 million more than the previous February. The labor force participation level was 1.9 percent lower than February 2020, indicating that individuals who left the workforce have not rejoined it. In terms of the global economy, the International Monetary Fund’s (IMF) October 2020 World Economic Outlook predicted that the world real GDP would fall by 4.4 percent from 2019. [Note: contains copyrighted material].

[PDF format, 15 pages].

What’s the ECB Doing in Response to the COVID-19 Crisis?

What’s the ECB Doing in Response to the COVID-19 Crisis? Brookings Institution. Sage Belz et al. June 4, 2020

Like the Fed, the ECB has responded to the COVID-19 pandemic by pledging to lend freely and stepping up its purchases of government debt. “Extraordinary times require extraordinary action,” said Christine Lagarde, the ECB president. “There are no limits to our commitment to the euro. We are determined to use the full potential of our tools, within our mandate.” But the governance of the ECB and the political environment in which it operates differ from those of the Fed, and at times have complicated the ECB’s response to the crisis. [Note: contains copyrighted material].

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Real and Imagined Constraints on Euro Area Monetary Policy

Real and Imagined Constraints on Euro Area Monetary Policy. Peterson Institute for International Economics. Working Paper 18-8. Patrick Honohan. August 2018

 Although the European Central Bank (ECB) has been pursuing an aggressively expansionary policy since 2012, previously the ECB was behind the curve in lowering interest rates and making asset purchases to combat the prolonged euro area recession. This paper argues that part of the delay can be attributed to the multi-country nature of the euro area. Over-interpreting the limitations of the ECB’s statutory mandate, some ECB decision makers were wary of being accused of circumventing the prohibition on monetary financing by intervening in the market of the debt of weaker governments. Some were also mesmerized by the relatively strong performance of the German economy in the crisis and attributed the slower post-crisis recovery of most other member states to national policy failures that should not be offset by euro area monetary policy. All of this was exacerbated by the ECB’s adoption of and (at least until 2011) adherence to a seductive but analytically flawed “separation principle,” which misled some of its decision makers into overestimating the adequacy of the monetary expansion that was being applied. The ECB’s toolbox is indeed somewhat limited by its statute, reflecting multi-country considerations, but abandonment of the separation principle should help ensure a more effective, holistic approach to monetary policy design in the future. [Note: contains copyrighted material].

 [PDF format, 26 pages].

The First 20 Years of the European Central Bank: Monetary Policy

The First 20 Years of the European Central Bank: Monetary Policy. Brookings Institution. Philipp Hartmann and Frank Smets. September 13, 2018

 The European Central Bank’s Philipp Hartmann and Frank Smets provide a comprehensive view of the ECB’s monetary policy over these two decades. The authors provide a chronological account of the macroeconomic and monetary policy developments in the euro area since the adoption of the euro in 1999, and describe the monetary policy decisions from the ECB’s perspective and against the background of its evolving monetary policy strategy. [Note: contains copyrighted material].

 [PDF format, 70 pages].