COVID-19: A Global Economic Crisis on the Horizon? - Research Paper

Introduction

The coronavirus is choking the world economy. In a few weeks, the highly contagious illness has pushed the world to the edge of a recession more severe than the 2008 financial crisis. The latter was a worldwide economic calamity because millions of individuals lost their savings, homes, jobs, and their businesses, and the banks collapsed. Most of the people fear that the outbreak of coronavirus will evolve as a worldwide pandemic. However, whereas the economic disruption caused by the epidemic appears to be sizeable, the lasting impacts of the economy on the economy will be less severe than the 2008 financial crisis under the condition that the authorities act rapidly to contain the economic crisis (McKibbin & Fernando, 2020). When a recession happens and how deep and long it lasts, it relies on the policy. The magnitude and duration of the downturn will depend on various aspects such as the norm of the virus itself, economic interventions, and responses to public health. Given the remarkable nature of the coronavirus crisis, fiscal and monetary policies are working in the absence of a playbook.

Is your time best spent reading someone else’s essay? Get a 100% original essay FROM A CERTIFIED WRITER!

Save 25%

Literature Review

Most of the authors have explained the role of fiscal and monetary policies in curbing the financial crisis. However, there is less or limited research on how nations are applying fiscal and monetary policy to mitigate the virus recession. Global monetary and fiscal policymakers have introduced measures to respond to the COVID-19 (Guerrieri et al., 2020; Atkeson, 2020; Fernandes, 2020). Central bankers are becoming creative in improving liquidity and back up financial systems. Fiscal policy has come gradually and has focused on health care institutions and the employees and corporations that have been significantly impacted by the coronavirus distortion.

United States' Policy Responses

Monetary Policy

In the United States, some of the monetary policy responses have involved the intervention of the central bank to guarantee liquidity in the financial sectors. During the start of March 2020, the U. S central bank decreased the interest rates though this has not caused substantial calming of investors in the capital markets. In reaction to the rising concerns over the worldwide economic influence of the pandemic, the finance ministers of the G-7 nations released a statement on 3rd March 2020, showing that they will use the suitable policy tools to sustain the growth of the economy. The finance ministers pledged fiscal support to guarantee health systems can sustain efforts. In most scenarios, in any case, however, nations have pursued their divergent approaches in some instances, such as prohibiting exports of medical equipment. After the G-7 statement, the U.S Federal Reserve (Fed) reduced its federal funds rate by fifty basic points or 0.5%, to a range of 1.0% to 1.25% as a result of the concerns regarding the evolving risks to the economical operation of the coronavirus. Calming activities of central banking are confirmed due to the responses of investors operating on financial markets, particularly the capital markets are becoming terrifying, the merit of psychological fear of likely financial losses even though it is not yet acknowledged the size of the losses in the future. Also, Fed has attempted boosting the size of its daily overnight repurchase operations, decreasing the discount-window rate, and enabling banks to borrow it for three months, decreasing the reserve requirement ratios to zero and establishing the U.S dollar swap lines to at least a dozen banks around the globe.

Fiscal Policy

The United States made various fiscal policy responses to mitigate the coronavirus recession. On 6th March, 2020, the Congress passed the $8.3 billion the Coronavirus Preparedness and Response Supplemental Appropriations Act to law. It offed extra financing for the Centers for Disease Control and Prevention (CDC) to buy medical equipment. On 18th March 2020, the Families First Coronavirus Response Act was passed to law. It aimed at responding to the calamity by offering paid sick leave, food assistance, unemployment benefits, and necessitating the employers to offer extra protection for the health care employees (Reuters, 2020).

The Cate Act was passed by senate and house, and it is head to the White House to be signed by the president to law. The bill entails $1, 200 direct cash payments to persons totaling to persons accounting to a limit of $75, 000 yearly, plus $500 per child. Furthermore, it elongates to unemployment benefits and raises the weekly payments, suspends the federal loan payments by students with no interest for half-an-year, and delaying the 2019 tax-filing deadline by three months. Additionally, for small enterprises, the bill constitutes the $350 billion in affordable loans that can be dispensed when used to pay workers and enables corporations to defer social security payroll taxes. It comprises of an additional $500 billion worth of loans and funds for helping the established companies hit by the coronavirus distortion, entailing airlines (Reuters, 2020). Lastly, it offers extra funding to the nursing homes, hospitals, CDC, and state government to combat the coronavirus.

United Kingdom's Policy Responses

Monetary Policy

The Bank of England decreased its benchmark interest rate from 0.75% to 0.1% in duo cuts on 10th and 19th March and promised to buy extra PS200 billion worth of corporate and government bonds. Also, it decreased the capital requirements of the banks and started buying commercial paper to fund the established firms (Dermine & Markakis, 2020).

Fiscal Policy

The United Kingdom government is planning to provide loans that are not charged interests to small businesses, elongate sick pay and unemployment, and enable individual and corporate tax deferrals. Nonetheless, it boosts the spending in the health care sector, pay up to 0.8 of the wages of furloughed employees to almost PS2,500 monthly and providing assistance to paying rents to particular groups. The total new spending accounts 3% of gross domestic product (Dermine & Markakis, 2020).

Canada's Policy Responses

Monetary Policy

On 4th, 13th, and 17th March 2020, the Bank of Canada decreased its benchmark rate 0.5 percentage point every moment to 0.25%. The central bank started purchasing mortgage bonds and short-term notes, and decreased the capital requirements for institutions in the financial sector. In addition, the Bank of Canada established a new commercial paper buying initiative and started purchasing government securities in the secondary market (Reuters, 2020).

Fiscal Policy

The parliament passed an elongated economic stimulus package that was worth C$107 billion, the equivalent of the gross domestic product. It involves monthly payments of C$2,000 to persons out of work because of the coronavirus, postponements of particular mortgage and payments of student loans. The federal government has pledged to pay $10% of the wage expenses of small businesses for 90 days and offer them C$10 billion of affordable loans (Reuters, 2020).

China's Policy Responses

Monetary Policy

In February 2020, the People's Bank of China reduced its benchmark interest rates from 4.15% to 4.05% and lowered the rates on shorter-term rates its regulations. Furthermore, the bank decreased the reserve ratios for commercial lenders.

Fiscal Policy

The central government of China is destined to pass a new budget in April 2020 that will entail substantial stimulus spending in the context of subsidies, cutting down of taxes, or both.

Australia's Policy Responses

Monetary Policy

On 3rd and 19th March, the Reserve Bank of Australia decreased the interest rates to 0.25% in two 0.25% points' cuts (Dermine & Markakis, 2020). It started buying government bonds for the initial time and established a financing facility for banks to nearly A$90 billion.

Fiscal Policy

Australia's government plans a total of A$89.6 billion in new spending, worth about 4.7% of GDP. It includes funds targeted at the country's health system, direct cash payments to low-income households and unemployed people, and funding for small businesses meant to minimize layoffs (Dermine & Markakis, 2020).

Japan's Policy Responses

Monetary Policy

The Bank of Japan has maintained its interest rate at -0.10% though it would elongate purchases of Japanese government bonds and exchange-traded funds. Furthermore, it has launched a new amenity for corporate funding.

Fiscal Policy

The government has increased its spending to YEN2 trillion, which is equivalent to 0.4% of the gross domestic product, towards targeting the national medical system and financing coronavirus testing. It has provided loans to small enterprises and offered measures to help individuals out of work because of the outbreak and related closures.

Analysis

The IS-LM model is a graphical presentation of the macroeconomy. The model provides a solution for equilibrium in both the money market and the goods market, considering particular parameters as presented. Policymakers can use the IS-LM model to evaluate what occurs to the interest rates and output when they decrease or increase the money supply.

Fiscal Policy

The cutting down of taxes as an expansionary fiscal policy involves the increase of the disposable income of the individual to raise their consumption demand. Due to this, the decrease in taxes causes a shift in the IS curve from IS1 to IS2, as demonstrated in figure 20.7. the horizontal movement in the IS curve is determined by the tax multiplier multiplied by the decrease of taxes (DT). In this context, DT x MPC/1-MPC and causes an increase in income level by EH.

In the IS-LM model, the shift of the IS curve from IS1 to IS2 will result in the movement of the equilibrium from point E to D. the rate of interest will increase from r1 to r2 and income level from Y1 to Y2. The crowding-out effect on private investment due to the increase in interest rate wipes out the income that is equivalent to LH.

In contrast, when the government intervenes in the economy to decrease the inflationary pressures, it will increase the rates of personal taxes to decrease the disposable income of the individuals. The rise of personal taxes will result in a reduction in aggregate demand. The decrease in aggregate demand will assist in regulating inflation.

As the economy is on the brink of coronavirus recession, the Central Bank implements the expansionary monetary policy that will pull the respective economy from the recession. Therefore, it requires measures to raise the money supply in the economy. The increase in money supply and money demand remaining constant will result in a decrease in the interest rate.

According to figure 20.8, when the interest is low, the business people will invest more. High volumes of investment will trigger the rise of income and aggregate demand. This depicts that with the expansion of the money supply, and then the LM curve will move to the right. Due to this, the economy will shift from the equilibrium E to D. The rate of interest will decrease from r1 to r2, and the national income will rise from Y1 to Y2. Hence, the IS-LM model demonstrates that the expansion in the money supply will decrease the interest rate and increase income.

Many authors have aired their opinions on the significance of IS-LM on understanding the impact of monetary and fiscal policy responses on the macroeconomy. According to Golmohammadpoor Azar et al. (2011), in September 2007, the Federal Reserve, the Bank of England, and the Bank of Japan decreased its policy rate to almost zero. By decreasing the real interest rates, the central banks assisted stimulate the domestic d...