Monetary Policy and COVID-19

By Michal Brzoza-Brzezina, Marcin Kolasa, Krzysztof Makarski

November 12, 2021

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Michal Brzoza-Brzezina, Marcin Kolasa, and Krzysztof Makarski. Monetary Policy and COVID-19, (USA: International Monetary Fund, 2021) accessed November 12, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We study the macroeconomic effects of the COVID-19 epidemic in a quantitative dynamic general equilibrium setup with nominal rigidities. We evaluate various containment policies and show that they allow to dramatically reduce the welfare cost of the disease. Then we investigate the role that monetary policy, in its capacity to manage aggregate demand, should play during the epidemic. According to our results, treating the observed output contraction as a standard recession leads to overly expansionary policy. Finally, we check how central banks should resolve the trade-off between stabilizing the economy and containing the epidemic. If no administrative restrictions are in place, the second motive 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.

Subject: Consumption, COVID-19, Economic growth, Economic recession, Health, Inflation, National accounts, Prices

Keywords: Consumption, Containment measure, Containment measures, Containment policy, COVID-19, Economic recession, Epidemic model, Epidemics, Inflation, Monetary policy, Monetary policy stance, Optimal monetary policy

Publication Details

Pages:

42
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2021/274
Stock No:

WPIEA2021274
ISBN:

9781616356309
ISSN:

1018-5941

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