Dimitris Georgarakos, Geoff Kenny, 28 April 2022

The COVID-19 pandemic shock posed an enormous challenge to fiscal policy in supporting household consumption. This column discusses the extent to which the pandemic-related fiscal interventions influenced consumers’ spending behaviour. Using new high-frequency data, the authors find that improving perceptions about the adequacy of fiscal interventions incentivised spending. Importantly, this perceptions channel operated equally strongly for consumers who received government support and for those who did not. Consumers who viewed the adequacy of fiscal packages more favourably also expected higher future incomes and easier access to credit, and did not anticipate an increase in taxes.

Atsushi Inoue, Barbara Rossi, Yiru Wang, 14 April 2022

Estimates of fiscal policy multipliers differ widely in the literature. A possible explanation for this wide range of estimates is that the effects of fiscal shocks and the government spending multipliers vary over time, but what exactly determines them is an open question. Using a new time-varying parameter local projection with instrumental variables technique, this column sheds new light on the magnitude of time variation in the effects of fiscal policy shocks and multipliers. 

Francois de Soyres, Ana Maria Santacreu, Henry Young, 01 March 2022

To mitigate the health and economic fallout from the COVID crisis, governments worldwide engaged in massive fiscal support programmes. This column shows that governments that provided generous fiscal support increased the demand for consumption goods during the pandemic, but industrial production did not adjust quickly enough to meet the sharp increase in demand. This imbalance between supply and demand across countries led to high inflation. The findings suggest a sizable role for fiscal policy in affecting price stability, above and beyond what a monetary authority can do.

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

Countries worldwide launched wide-scale fiscal support measures to mitigate the unprecedented output losses caused by lockdowns aimed at flattening the COVID-19 curve. This column examines the effects of fiscal policy measures during the pandemic, using a novel database of daily fiscal policy announcements and high-frequency economic indicators for 52 countries from January 1 to December 31, 2020. The authors find that fiscal policy announcements have been effective in stimulating economic activity, boosting confidence, and reducing unemployment, but their effect varies by the type of measure and the stage of the pandemic. 

Sebnem Kalemli-Ozcan, 04 January 2022

What were the effects of fiscal policy in response to the COVID-19 pandemic at the firm, sector, country and global level, and how efficient was it?

Read more about this research and download the free DP:

Gourinchas, P, Kalemli-Ozcan, S, Penciakova, V and Sander, N. 2021. 'Fiscal Policy in the Age of COVID: Does it 'Get in all of the Cracks?'' CEPR

Claudio Borio, Piti Disyatat, 10 November 2021

Monetary and fiscal policies, as deeply entwined functions of the state, face a looming dual long-term challenge. This column argues that they need to regain policy headroom to be able to effectively fulfil their macro-stabilisation role. And once these safety margins are restored, the policies need to remain firmly within a ‘corridor of stability’, in which neither can endanger the other or push it to the limit. In addition, navigating the path ahead will require a mix of ‘opportunistic normalisations’ and structural reforms to raise long-term growth. 

Sean Dougherty, Pietrangelo de Biase, 26 October 2021

Following the global financial crisis, subnational governments engaged in pro-cyclical fiscal policy by reducing investment, drawing out the recovery. This column presents evidence suggesting that the Covid crisis has impacted the fiscal positions of subnational governments in the OECD far less than the previous crisis, which should mitigate this tendency towards pro-cyclicality. This is partly the result of central governments having provided substantial fiscal support, while at the same time subnational governments have relied heavily on relatively stable revenues from recurrent taxes on immovable property which, unlike in the previous crisis, are not expected to decline due to a housing market crash.

Juan Pablo Cuesta, Swarnali Ahmed Hannan, 12 August 2021

Covid-19 has had a staggering adverse impact on lives and livelihoods, disproportionately affecting the poor and the vulnerable. To shed light on possible scarring effects, this column studies the effect of five past pandemics on output, unemployment, poverty, and inequality in the near and medium term. The findings reveal significant negative effects, although countries that provided relatively large fiscal support experienced limited output declines. Historically, increases in unemployment, poverty, and inequality were lower for countries with greater fiscal support and relatively stronger initial conditions, which included higher formality, family benefits, and health spending. 

Lucrezia Reichlin, Giovanni Ricco, Matthieu Tarbé, 05 August 2021

Monetary policy has fiscal implications since its effect on interest rates, inflation and output relaxes or tightens the general government inter-temporal budget constraint. Inflation dynamics is the result of both monetary policy and the fiscal response to it via the adjustment of the primary deficit. This column discusses estimates of the fiscal responses to monetary policy in the euro area. It shows that the more modest impact of unconventional monetary policy easing on inflation, if compared with the impact of conventional easing, can be explained by a more modest increase in the primary deficit in the former case.

Jonathan D. Ostry, 30 July 2021

Jonathan Ostry of the IMF has investigated a century of pandemics and discovered that not only do they make our societies less equal, but they lead to a K-shaped recovery. He tells Tim Phillips that, unlike other crises, pandemics open a permanent gap between winners and losers.

You can download the paper that Jonathan is discussing (Furceri, D, Loungani, P, Ostry, J and Pizzuto, P. 2021. 'Will COVID-19 Have Long-Lasting Effects on Inequality? Evidence from Past Pandemics'. London, Centre for Economic Policy Research.) free here

Sebastian Schmidt, 06 July 2021

Inflation shortfalls across the developed world have raised concerns about the possibility of low-inflation traps. This column presents a simple model of inflation to analyse the role of stabilisation policy in preventing them. It suggests that decisive countercyclical fiscal policy can protect economies from falling into a low-inflation trap by offsetting low inflation expectations. 

Davide Furceri, Prakash Loungani, Jonathan D. Ostry, Pietro Pizzuto, 03 June 2021

In the aftermath of past pandemics, fiscal policy played an important role in reducing or amplifying income inequality. This column predicts the likely distributional effects of Covid-19 by analysing evidence from five previous outbreaks (SARS, H1N1, MERS, Ebola, and Zika). It finds that severe austerity measures were associated with inequality increases three times greater than expansive fiscal policy following a pandemic. Premature austerity is self-defeating from both a macro and an equity standpoint.

Christian Bayer, Benjamin Born, Ralph Luetticke, 20 May 2021

Debt-financed fiscal expansions have been a critical feature in many countries’ policy response to Covid-19. This column revisits the role of public debt in stimulating economic recovery. The authors identify both short-run and long-run effects, highlighting that higher public debt has small effects on the capital stock but leads to a sizable decline of the liquidity premium, which increases the fiscal burden of debt. Further, the revenue-maximising level of public debt is positive and has increased to 60% of GDP post-2010.

Martin Larch, Janis Malzubris, Stefano Santacroce, 19 May 2021

In 2020, EU member states launched massive fiscal measures to mitigate the economic and social fallout of the Covid pandemic. The activation of the severe economic downturn clause of the Stability and Growth Pact, coupled with a decisive intervention of the ECB, offered member states the flexibility to stage their fiscal response. As this column reveals, however, a closer look through the lens of an expenditure benchmark highlights important cross-country differences reflecting deeper issues. Countries with very high debt and/or high sustainability risks are bound by their meagre growth prospects. If unaddressed, future reviews of the EU fiscal rules may buy time, but not solve the underlying issues. 

Michele Andreolli, Paolo Surico, 29 April 2021

What is the consumption response to unexpected transitory income gains of different size and what are the aggregate demand implications of stimulus packages that target different segments of the population? This column explores these questions using responses to hypothetical questions in the Italian Survey of Household Income and Wealth. Families with low cash-at-hand display a higher marginal propensity to consume out of small gains, while affluent households exhibit a higher marginal propensity to consume out of large gains. For a given level of public spending, a fiscal transfer of a smaller size paid to a larger group of low-income households stimulates aggregate consumption more than a larger transfer paid to a smaller group.

Olivier Blanchard, Álvaro Leandro, Jeromin Zettelmeyer, 22 April 2021

The EU’s fiscal rules are currently suspended. If reinstated, they will need to be modified to account for the higher levels of debt. This column, part of the Vox debate on euro area reform, argues that simple fiscal rules provide a crude and unsatisfactory assessment of debt sustainability and proposes that they be replaced with fiscal standards. In particular, it calls for qualitative prescriptions that leave room for judgement together with a process to decide whether the standards are met. This proposal envisages a larger surveillance role for independent fiscal councils and/or the European Commission, as well as a judicial body for adjudication over disputes. 

Vincent Aussilloux, Adam Baïz, Matthieu Garrigue, Philippe Martin, Dimitris Mavridis, 19 February 2021

The Covid-19 crisis has presented policymakers across the euro area with an unprecedented challenge, not least of all because the shock has come to both the supply side and the demand side of the economy. This column presents a preliminary analysis of different nations’ responses so far, focusing on which measures have been deployed to address each side of the economic shock and where a ‘mixed approach’ has been taken to work in tandem. At a time where coordinated action may be needed, there is a concerning level of inconsistency in strategy. 

Cristiana Belu Manescu, Elva Bova, 07 February 2021

Expenditure rules are recognised as one of the most effective tools to manage budgetary aggregates, and many EU members have recently chosen to add an expenditure rule to their national frameworks. In many cases, the 2012 introduction of the expenditure benchmark at the EU level was a major catalyst. Against this background, this column takes stock of the current design of national expenditure rules across EU member states and provides new evidence on their effectiveness in reducing the procyclicality bias of fiscal policy.

Thiess Buettner, Boryana Madzharova, 27 October 2020

Facing the economic consequences of the Covid-19 pandemic, governments all over the world are considering providing a fiscal stimulus. A potentially powerful instrument to do so is a broad-based consumption tax such as VAT. This column argues that changes in VAT may have some effect in stimulating spending on certain consumer durable goods such as household appliances. However, these effects may be heterogenous across different product types and the timing and perceived credibility of the announcements are also important factors for policymakers to consider.

Joshua Aizenman, Hiro Ito, 27 October 2020

The economic policies of the US in the post-COVID era will have important implications for the global economy. This column outlines two different exit strategies for the US from the COVID-related debt-overhang and analyses their implications for emerging markets and global stability. A strategy of continuing loose fiscal policies and accommodating monetary policies may spur short-term growth but would also increase the risks a deeper crisis in the future. Alternatively, the US could adopt a two-pronged approach of shifting fiscal priorities towards expenses with high social payoffs and then promoting fiscal adjustments aimed at a primary surplus and debt resilience. The post-WWII success story illustrates the feasibility of, and gains from, a two-pronged fiscal strategy.



CEPR Policy Research