In Major Economic Shocks, Best Response Combines All-Out, Large-Scale Policies
IMF Blog, February 27, 2023
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Bibliographic details
- Authors: Divya Kirti, Maria Soledad Martinez Peria, Prachi Mishra, Jan Strasky
- Published: February 27, 2023
Overview
- Authors: Divya Kirti, Maria Soledad Martinez Peria, Prachi Mishra, Jan Strasky (research contributions by Yang Liu)
- Date: February 27, 2023
- Context: Analysis of national announcements of economic and financial policy responses to the COVID-19 pandemic using a dataset tracking these announcements.
Key findings
- Countries most frequently used packages combining more than one fiscal, monetary, or prudential policy during 2020; standalone policy announcements were rare.
- All-out policy packages—combining large fiscal, monetary, and prudential measures—boosted credit growth by a sizable "5 percentage points per quarter".
- Packages that combined all policy types but where only some measures were large were less effective than packages in which measures were large in both size and scope.
- All granular policy tools tracked were more prevalent in successful packages than in others, underscoring the role of breadth and intensity.
Mechanisms behind effectiveness
- All-out responses likely worked because they:
- Pulled all levers relevant for credit growth when facing a large, unexpected, global shock.
- Eased binding constraints by shifting regulatory requirements.
- Incentivized incremental lending by addressing heightened concerns about credit risk.
- Supported credit demand by lowering borrowing costs.
- Within banks, the impact of policies was greater for those constrained by thin capital buffers.
Impact on firms and liquidity
- Packages combining large fiscal, monetary, and prudential measures translated into additional access to liquidity for bank-dependent firms.
- That additional liquidity allowed firms to cover expenses—like wage bills—for "two additional months" while health measures limited sales.
- COVID-19 policy packages were broadly targeted and do not appear to have disproportionately benefited firms with poor performance prior to the pandemic.
Lessons for future crises and caveats
- In future crises that combine negative supply and demand shocks with significant uncertainty (as the pandemic did), a concerted, coordinated, all-out approach may play an important role in supporting the economy.
- Not all countries can respond with large-scale packages; emerging and developing economies were more constrained during the pandemic and will likely continue to be more constrained.
- Potential unintended consequences of an all-out approach include:
- Large fiscal and monetary packages could fuel "sharp inflationary pressures".
- In countries with high debt, increased discretionary spending could strain debt sustainability.
- Further research is needed to better understand how to calibrate the appropriate all-out response to minimize such costs.
Source: In Major Economic Shocks, Best Response Combines All-Out, Large-Scale Policies — Divya Kirti, Maria Soledad Martinez Peria, Prachi Mishra, Jan Strasky; February 27, 2023 (includes research contributions by Yang Liu).