Economic Policies for the COVID-19 War
IMF Blog, April 1, 2020
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Bibliographic details
- Authors: Giovanni DellAriccia, Paolo Mauro, Antonio Spilimbergo, Jeromin Zettelmeyer
- Published: April 1, 2020
Overview
- Authors: Giovanni Dell’Ariccia, Paolo Mauro, Antonio Spilimbergo, Jeromin Zettelmeyer
- Date: April 1, 2020
- Framing: The COVID-19 pandemic is described as a crisis "like no other" and "feels like a war." The public sector plays an increased role, and the pace of recovery depends crucially on policies enacted during the crisis.
Two phases of the crisis
- Phase 1: the war
- Description: The epidemic is in full swing; mitigation measures are severely curtailing economic activity.
- Expected duration: "at least one or two quarters."
- Policy priority: Save lives and limit contagion; support households and firms to preserve the productive fabric.
- Phase 2: the post-war recovery
- Description: Epidemic under control with vaccines/drugs, partial herd immunity, and continued but less disruptive containment measures.
- Policy priority: Facilitate return to normal functioning as restrictions are lifted; fiscal measures to boost demand become more effective.
Wartime policy objectives and measures
- Core insight: The output fall is not driven by demand but by containment measures; hence initial policy is not primarily demand stimulus.
- Three policy objectives:
- Guarantee the functioning of essential sectors
- Boost resources for COVID-19 testing and treatment.
- Maintain regular health care, food production and distribution, essential infrastructure, and utilities.
- Possible measures: prioritization of public contracts for critical inputs and final goods; conversion of industries; selective nationalizations; rationing; price controls; rules against hoarding.
- Examples: France’s early seizing of medical masks; activation of the Defense Production Act in the United States.
- Provide enough resources for people hit by the crisis
- Support households who lose income to stay at home while keeping their jobs.
- Measures: government-funded sick leave, expanded and extended unemployment benefits, cash transfers to reach the self-employed and those without jobs.
- Prevent excessive economic disruption
- Safeguard relationships among workers and employers, producers and consumers, lenders and borrowers.
- Prevent loss of organizational know-how and termination of long-term projects.
- Support to private firms, including wage subsidies and large programs of loans and guarantees (with risks borne by taxpayers).
- Examples: EU relaxation of state-aid rules to facilitate direct capital injections; potential expansion of large state holding companies to take over distressed private firms.
- Design principles:
- Greater public intervention is justified while exceptional circumstances persist, but must be transparent and include clear sunset clauses.
- Policies will involve a mix of liquidity measures (provision of credit, postponement of financial obligations) and solvency measures (transfers of real resources).
Tradeoffs and implementation details
- Conditionality and equity:
- Transfers or subsidized loans to large corporations should be conditional on preserving jobs and limiting CEO compensation, dividends, and stock repurchases.
- Bankruptcy ensures equity holders share costs but causes significant economic dislocation.
- Intermediate option: government takes an equity stake in firms.
- When liquidity is the problem:
- Central-bank credit through asset purchase programs or government-controlled intermediaries via loans and guarantees has been effective in past crises.
- Support to small- and medium-sized enterprises and self-employed:
- Many practical questions arise in identifying and supporting these groups.
- Consider direct transfers based on past tax payments.
- International dimension:
- Maintain international trade and cooperation, especially for health-care items and the free exchange of scientific information.
- Limit movement of people for containment, but resist shutting down trade.
From shelter-in-place to recovery
- Recovery challenges:
- Higher levels of public debt and possibly expanded government control over parts of the economy.
- Relative success in Phase 1 will allow a return to normal policy operations.
- Fiscal context:
- Prior projections: interest rates and inflation were projected to be "low-for-long" in most advanced economies before the pandemic.
- Preventing major supply-chain disruptions should avoid inflation during the emergency and recovery phases.
- If containment measures succeed:
- The necessary increase in the public debt ratio will have been sizable.
- Interest rates and aggregate demand are likely to remain low in the recovery phase.
- Under those circumstances, fiscal stimulus will be appropriate and highly effective in most advanced economies and will facilitate exit from exceptional measures.
Key policy recommendations (summary)
- Prioritize life-saving and essential-service functioning.
- Provide targeted support to households to preserve jobs and income (government-funded sick leave; expand and extend unemployment benefits; cash transfers for self-employed and informal workers).
- Prevent firm and financial-sector dislocation via wage subsidies, loans, guarantees, and where necessary equity injections or state holding companies.
- Make corporate support conditional on job preservation and limits on executive pay, dividends, and stock buybacks.
- Use a mix of liquidity and solvency measures; rely on central-bank asset purchases and government intermediaries when liquidity constraints dominate.
- Consider direct transfers for small firms and the self-employed based on past tax records.
- Maintain international trade in health-care goods and scientific cooperation; avoid trade shutdowns.
Source: IMF blog "Economic Policies for the COVID-19 War," April 1, 2020.
