{
  "title": "In Major Economic Shocks, Best Response Combines All-Out, Large-Scale Policies",
  "publication": "IMF Blog, February 27, 2023",
  "sourceUrl": "https://www.imf.org/en/blogs/articles/2023/02/27/in-major-economic-shocks-best-response-combines-all-out-large-scale-policies",
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  "summary": "Bank lending grew faster in countries with policy packages combining large fiscal, monetary, and prudential measures",
  "sections": [
    {
      "heading": "Overview",
      "content": "- Authors: Divya Kirti, Maria Soledad Martinez Peria, Prachi Mishra, Jan Strasky (research contributions by Yang Liu)\n- Date: February 27, 2023\n- Context: Analysis of national announcements of economic and financial policy responses to the COVID-19 pandemic using a dataset tracking these announcements."
    },
    {
      "heading": "Key findings",
      "content": "- Countries most frequently used packages combining more than one fiscal, monetary, or prudential policy during 2020; standalone policy announcements were rare.\n- All-out policy packages—combining large fiscal, monetary, and prudential measures—boosted credit growth by a sizable \"5 percentage points per quarter\".\n- 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.\n- All granular policy tools tracked were more prevalent in successful packages than in others, underscoring the role of breadth and intensity."
    },
    {
      "heading": "Mechanisms behind effectiveness",
      "content": "- All-out responses likely worked because they:\n  - Pulled all levers relevant for credit growth when facing a large, unexpected, global shock.\n  - Eased binding constraints by shifting regulatory requirements.\n  - Incentivized incremental lending by addressing heightened concerns about credit risk.\n  - Supported credit demand by lowering borrowing costs.\n- Within banks, the impact of policies was greater for those constrained by thin capital buffers."
    },
    {
      "heading": "Impact on firms and liquidity",
      "content": "- Packages combining large fiscal, monetary, and prudential measures translated into additional access to liquidity for bank-dependent firms.\n- That additional liquidity allowed firms to cover expenses—like wage bills—for \"two additional months\" while health measures limited sales.\n- COVID-19 policy packages were broadly targeted and do not appear to have disproportionately benefited firms with poor performance prior to the pandemic."
    },
    {
      "heading": "Lessons for future crises and caveats",
      "content": "- 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.\n- 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.\n- Potential unintended consequences of an all-out approach include:\n  - Large fiscal and monetary packages could fuel \"sharp inflationary pressures\".\n  - In countries with high debt, increased discretionary spending could strain debt sustainability.\n- Further research is needed to better understand how to calibrate the appropriate all-out response to minimize such costs.\n\nSource: 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).\n\n---\n\n\n References\n\n- working paper\n- made available\n- as they were in this episode\n- sharp inflationary pressures\n\nSource: https://www.imf.org/en/blogs/articles/2023/02/27/in-major-economic-shocks-best-response-combines-all-out-large-scale-policies"
    }
  ],
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    "Authors: Divya Kirti, Maria Soledad Martinez Peria, Prachi Mishra, Jan Strasky",
    "Published: February 27, 2023",
    "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.",
    "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.",
    "All-out responses likely worked because they:",
    "Within banks, the impact of policies was greater for those constrained by thin capital buffers.",
    "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.",
    "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:",
    "Further research is needed to better understand how to calibrate the appropriate all-out response to minimize such costs.",
    "[working paper](https://www.imf.org/en/Publications/WP/Issues/2023/02/03/What-Policy-Combinations-Worked-The-Effect-of-Policy-Packages-on-Bank-Lending-during-COVID-529118)",
    "[made available](https://www.imf.org/en/Publications/WP/Issues/2022/06/03/Tracking-Economic-and-Financial-Policies-During-COVID-19-An-Announcement-Level-Database-518896)",
    "[as they were in this episode](https://www.imf.org/en/Blogs/Articles/2020/10/14/blog-fiscal-policy-for-an-unprecedented-crisis)",
    "[sharp inflationary pressures](https://www.imf.org/en/Blogs/Articles/2022/10/11/policymakers-need-steady-hand-as-storm-clouds-gather-over-global-economy)"
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