What is the best economic policy response to the coronavirus?

Posted by: Paul Donovan

13 Mar 2020
  • Fear of the coronavirus creates a supply shock and a demand shock. What should policy makers be doing?
  • There is a suggestion that international policy should be coordinated as with the 2008 global financial crisis. However, in 2008 the same shock hit countries at the same time, and required broadly the same policy reaction. The virus will hit different countries differently, at different times. International coordination may not be that useful.
  • Coordination of fiscal and central bank policy is more important. There are two things policy can do: limit the slowdown; and speed up the bounce back.
  • In the near term, policy should be targeted to limit economic damage. In particular small businesses will face cash flow problems. Specific lending programs and delays to tax payments will help. Helping small companies with sick pay, offering financial help to the self-employed, and interest payment holidays for those hit by the virus are good options.
  • Cutting rates will not cure the virus. Tax cuts will not encourage people to take cruises. This sort of monetary and fiscal stimulus will help after fear of the virus has peaked. Broad stimulus measures will boost the rebound. They will have a more limited effect over the next couple of months.

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