COVID-19: Governments must avoid creating additioal uncertainty by Henrik Müller published by VOXEU (3/2020).
“It is becoming clear that the coronavirus epidemic is causing major disruptions to economic activity worldwide, and the quest for adequate policy responses is underway. At the outset of the crisis, many affected countries have pursued a step-by-step approach, weighing a wide array of medical as well as economic policy counter measures. As quarantine requirements are imposed and virus-testing and hospital capacities are expanded, economic policy has started to cushion the fall-out from an exogenous shock that is harming both the demand and the supply side. As a first line of defence, all the G7 countries’ central banks have reacted by loosening monetary policy. Fiscal measures – ranging from targeting the effects of the outbreak directly (e.g. expanding sick-leave and short-hours schemes) to outright deficit spending programmes at the euro area level, as proposed by the French government – have been discussed and, partly, put into effect.
This piecemeal approach is misguided. We are confronted with a complex global crisis that is rooted in falling demand and supply as well as in high levels of uncertainty. It’s not just citizens staying out of supermarkets and firms having to halt production, it’s also profoundly blurred, or even bleak, expectations about the future that are bound to dampen investment and consumption (e.g. Bloom et al. 2007, Bloom 2009) over a longer period of time, with possibly grave consequences for economic growth and wellbeing. In this environment, governments should beware of worsening the situation by adding an extra dose of uncertainty themselves. Still, this is what is bound to happen in the course of the COVID-19 crisis. Recent economic history provides an analogy to the current situation…”
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