Monetary Policy and COVID-19
IMF Working Papers, November 12, 2021
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Bibliographic details
- Authors: Michal Brzoza-Brzezina, Marcin Kolasa, Krzysztof Makarski
- Published: November 12, 2021
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781616356309.001
Study framework and objectives
- Quantitative dynamic general equilibrium setup with nominal rigidities.
- Evaluate various containment policies and quantify welfare costs of the disease.
- Investigate the role of monetary policy in managing aggregate demand during the epidemic.
- Analyze central bank trade-offs between stabilizing the economy and containing the epidemic.
Main findings on containment policies
- Containment policies "allow to dramatically reduce the welfare cost of the disease."
Main findings on monetary policy stance
- "Treating the observed output contraction as a standard recession leads to overly expansionary policy."
- When no administrative restrictions are in place, the motive to contain the epidemic prevails and "despite the deep recession, optimal monetary policy is in fact contractionary."
- Conversely, "if sufficient containment measures are introduced, central bank interventions should be expansionary and help stabilize economic activity."
Policy implications and guidance
- Monetary policy should not mechanically treat epidemic-induced output contractions as standard recessions.
- Optimal monetary policy depends on the presence and strength of containment measures:
- No administrative restrictions: prioritize containment, optimal monetary policy may be contractionary.
- Sufficient containment measures: central bank interventions should be expansionary to stabilize activity.
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