The effects of fiscal measures during COVID-19

Pragyan Deb, Davide Furceri, Jonathan D. Ostry, Nour Tawk, Naihan Yang 02 February 2022



Since the beginning of the COVID-19 pandemic, countries worldwide have launched wide-scale fiscal support measures to mitigate the unprecedented output losses caused by necessary lockdowns aimed at flattening the COVID-19 curve (Gourinchas 2020, Auerbach et al. 2021, Deb et al. 2020). These measures have varied both in size and scope, with much larger announced interventions in advanced economies compared to emerging market and developing economies. In addition, a multitude of measures were used: emergency lifelines (which provided continued liquidity support to households and businesses in the form of loans or capital injections) were deployed in conjunction with demand-support measures (such as grants, direct transfers, tax relief schemes that can boost households and firms’ income). Fiscal space constraints likely played a role in determining the size and nature of fiscal packages. Countries with higher debt-to-GDP ratios relied more on below-the-line measures, while countries with relatively more space favoured above-the-line measures (Figure 1).  

Figure 1 Fiscal measures by type and debt-to-GDP 


Source: Deb et al. (2021). 

In a recent paper (Deb et al. 2021), we quantify the effect of fiscal policy announcements on economic activity in a cross-country setting, through the use of a novel daily database of announcements of fiscal policy interventions in 2020.  We also explore how effects vary across different types of measures, according to countries’ structural characteristics (e.g. per capita income, fiscal space), and according to the severity of the pandemic. 

Effect of fiscal measures on economic activity 

We examine the effect of announced fiscal stimulus measures on economic activity using economic indicators available at daily, weekly, and monthly frequencies. At a daily frequency, it is unlikely that fiscal announcements react to developments in the economy, which limits concerns about reverse causality. To further address endogeneity concerns, we purge the daily announcements from lagged daily measures of activity that have been used recently to track the economic effects of the COVID-19 crisis – specifically, nitrogen dioxide (NO2) emissions, international and domestic flights, mobility indicators, and daily financial variables that capture expectations regarding future economic activity. 

Our results suggest that fiscal announcements are associated with a persistent increase in stock market indicators and, consistent with theory and evidence in Auerbach and Gorodnichenko (2016), with an appreciation of the domestic currency vis-à-vis the US dollar (Figure 2). These results are corroborated at weekly frequencies, where we find that fiscal announcements are followed by an increase in the OECD economic tracker indicator.

Figure 2 Effect of fiscal measures on exchange rates and stock price indices  (deviation from the baseline, logs)

Source: Deb et al. (2021). 
Note: The bar shows the effect after 30 days of fiscal policy announcements (as % of GDP) on bilateral exchange rates and stock price indices.         

We also explore the effect of fiscal measures on more standard indicators of economic activity available at the monthly frequency, namely, industrial production (IP) indices, manufacturing purchasing managers’ indices (PMIs), unemployment rates, the OECD’s Composite Leading Indicator (CLI) for confidence, and sovereign credit default swap (CDS) spreads. For this purpose, and following Gertler and Karadi (2015), we aggregate the daily shocks into monthly average shocks. The results suggest that fiscal policy announcements have had, on average, a significant effect on economic activity (Figure 3). In particular, a fiscal shock of 1% of GDP increases industrial production by 0.25%, with the effect equivalent to a fiscal multiplier of 0.2 for the sample on average. Results also show that fiscal announcements boost PMIs and the CLI, and lead to a reduction in the monthly unemployment rate, and a narrowing in sovereign CDS spreads. 

Figure 3 Effect of fiscal measures on IP, PMI, CLI unemployment, and sovereign CDS spreads (% (LHS), percentage points (RHS)

Source: Deb et al. (2021). 
Note: The bar shows the monthly effect of 1% fiscal policy announcement (as % of GDP) on economic activity indicators. The effect on the unemployment rate is in percentage points and presented on the right hand-side axis. 

The role of country characteristics 

The average effect of fiscal stimulus measures on economic outcomes also varies depending on country characteristics. The results suggest that fiscal effects are larger for the advanced economies (Figure 4), consistent with previous findings in the literature (Ilzetzki et al. 2013). In addition, fiscal shocks appear much more effective in countries with lower public debt levels before the crisis, as the crowding-out effects on private investment and consumption are typically larger in countries with high debt (Nickel and Tudyka 2014, Furceri and Zdzienicka 2020). 

FIgure 4 Effect of fiscal announcement shocks on IP, depending on country characteristics (%)

Source: Deb et al. (2021). 
Note: The bar shows the monthly effect of 1% fiscal policy announcement (as % of GDP) on industrial production depending on a country’s income level (AE or EMDE) and the level of public debt. Light shaded bars denote no statistical significance.   

Type of fiscal measures and the pandemic cycle

While fiscal measures appear effective on average in boosting economic activity and confidence, their effect may also differ depending on the type of measure deployed, and on whether stringent containment measures are in place. Our results suggest that on average, emergency lifeline measures (the bulk of which are classified as below-the-line measures), are more effective than demand-support measures (which are mainly classified as above-the-line measures) (Figure 5). However, this result masks important heterogeneity with respect to the pandemic cycle. We find that emergency lifelines,  which aim to reduce supply constraints and keep firms operating and workers employed, were more effective during lockdowns, as they provided much needed cash flow and liquidity support during the months of constrained economic activity. Meanwhile, the effects of demand-support measures are much stronger when containment measures are being eased, as domestic consumption opportunities are higher at that stage. 

Figure 5 Effect of fiscal announcement shocks on IP, by type and depending on the pandemic cycle (%)

Source: Deb et al. (2021). 
Note: The bar shows the monthly effect of 1% fiscal policy announcement by type of measure (as % of GDP) on industrial production depending on whether containment measures are high or low. 


Auerbach, A J, Y Gorodnichenko, P McCrory, and D Murphy (2021), “What Covid-19 teaches us about fiscal multipliers”,, 23 December. 

Auerbach, A J and Y Gorodnichenko (2016), "Effects of fiscal shocks in a globalized world", IMF Economic Review 64(1): 177-215

Deb, P, D Furceri, J D Ostry, and N Tawk (2020), “The economic effects of COVID-19 containment measures”,, 17 June. 

Deb, P, D Furceri, J D Ostry, N Tawk, and N Yang (2021), “The effects of fiscal measures during COVID-19”, CEPR Discussion Paper 16726.

Furceri, D and A Zdzienicka (2020), “Twin deficits in developing economies”, Open Economies Review 31: 1–23.

Gertler, M and P Karadi (2015), “Monetary policy surprises, credit costs, and economic activity”, American Economic Journal: Macroeconomics 7(1): 44-76.

Gourinchas, P O (2020), “Flattening the pandemic and recession curves”,, 03 June. 

Ilzetzki, E, E G Mendoza, and C A Végh (2013), “How big (small?) are fiscal multipliers?”, Journal of Monetary Economics 60(2): 239-254.

Nickel, C and A Tudyka (2014), “Fiscal stimulus in times of high debt: Reconsidering multipliers and twin deficits”, Journal of Money, Credit and Banking 46(7): 1313-1344.



Topics:  Covid-19 Macroeconomic policy

Tags:  fiscal policy, fiscal measures, lockdowns, unemployment, COVID-19, policy announcements

Economist, International Monetary Fund

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