## Economic Policies for the COVID-19 War

_IMF Blog, April 1, 2020_

## Source details

**Canonical URL:** [Economic Policies for the COVID-19 War](https://www.imf.org/en/blogs/articles/2020/04/01/blog040120-economic-policies-for-the-covid-19-war)

## Other formats

- [Markdown version](/en/blogs/articles/2020/04/01/blog040120-economic-policies-for-the-covid-19-war/index.md)
- [Structured JSON version](/en/blogs/articles/2020/04/01/blog040120-economic-policies-for-the-covid-19-war/index.json)
- [Bundle manifest](/en/blogs/articles/2020/04/01/blog040120-economic-policies-for-the-covid-19-war/bundle-manifest.json)

## 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.*

---


## References

- [global community](https://www.imf.org/en/News/Articles/2020/03/27/pr20114-joint-statement-by-the-chair-of-imfc-and-the-managing-director-of-the-imf)
- [web of relations](https://blogs.imf.org/2020/03/09/limiting-the-economic-fallout-of-the-coronavirus-with-large-targeted-policies/)
- [programs](https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19)
- [https://www.imf.org/wp-content/uploads/2020/03/eng-march-31-covid-war-table-1.jpg](https://www.imf.org/wp-content/uploads/2020/03/eng-march-31-covid-war-table-1.jpg)
- [The IMF and COVID-19](https://www.imf.org/en/Topics/imf-and-covid19)

_Source: https://www.imf.org/en/blogs/articles/2020/04/01/blog040120-economic-policies-for-the-covid-19-war_