Fiscal and Monetary Policy Initiatives by Major Economies to Address COVID-19

Fiscal and Monetary Policy Initiatives by Major Economies to Address COVID-19

INSIGHTi

Fiscal and Monetary Policy Initiatives by
Major Economies to Address COVID-19
August 7, 2020

Overview
In response to the pandemic-related collapse in global economic growth in the first half of 2020, national
governments, central banks, and international organizations adopted unprecedented fiscal, monetary, and
other measures to stabilize financial markets and stimulate growth. The policy responses directed at the
initial liquidity crisis in the financial sector have also significantly raised government debt levels, pushed
unemployment rates to their highest levels in a generation, and reduced global economic growth by an
estimated 3.0% to 6.0%. The human costs in terms of lives lost could permanently affect global economic
output in addition to the cost of rising poverty levels, lives upended, shuttered businesses, and increased
social unrest.
Given the evolving nature of the health crisis, the economic crisis may persist longer than most
forecasters previously have assumed. A resurgence of cases in the United States, Europe, Asia, and Africa
has pushed some policymakers to re-impose restrictions, delaying economic recovery. Second quarter
U.S. gross domestic product (GDP) data indicates that economic output fell by 33% at an annual rate.
The challenge for policymakers is one of implementing targeted policies that address what had been
expected to be short-term problems without creating distortions in economies that could outlast the impact
of the virus. Many policymakers, however, have been overwhelmed by the quickly changing nature of the
health crisis that has turned into a global trade and economic crisis.
The IMF recently concluded that a number of pre-existing vulnerabilities could interact with the
pandemic to affect the timing and strength of the global economic recovery. These vulnerabilities include:
corporate and household debt levels in developed and some emerging economies that could become
unmanageable in a prolonged recession; rising insolvencies testing the resilience of the banking sector;
additional stresses affecting nonbank financial institutions; and some developing economies facing high
external financing requirements.
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Should these crises persist, policymakers may initiate additional fiscal and monetary measures. Such
measures, however, are likely to present policymakers with difficult choices given the economic resources
that already have been expended and could include weighing the demands of households, firms, and sub-
national governments seeking public assistance. In particular, liquidity constraints in the pandemic’s
initial phase could be succeeded by such challenges as firm bankruptcies, rising unemployment as short-
term wage supplements expire, home foreclosures and evictions, and lost tax revenues for state and local
governments.
Fiscal Policy Response
As a fiscal response, governments have provided direct support to the health sector, households, and
firms, although the size and scope of the programs vary by country. As indicated in Table 1, these
measures broadly include:
 Wage and income supplements to households, including expanded unemployment
insurance;
 Tax cuts and deferrals to households and businesses;
 Direct payments to households and;
 Other payments to businesses.
The U.S. Congress approved historic fiscal spending packages; other governments abandoned traditional
borrowing caps to increase fiscal spending in order to sustain economic growth. EU members recently
agreed to support a €750 billion pandemic economic assistance package. In March, President Trump
signed three major pieces of legislation providing similar assistance (P.L. 116-123), (P.L. 116-127), and
(P.L. 116-136). International organizations have taken steps to provide loans and other financial
assistance. Consumers in the U.S. and Europe have sharply increased their savings, potentially blunting
the economic impact of fiscal spending.
The International Monetary Fund (IMF) estimated that government spending and revenue measures to
sustain economic activity adopted through mid-June 2020 amounted to $5.4 trillion and that loans, equity
injections and guarantees totaled an additional $5.4 trillion, or a total of $10.8 trillion. The IMF estimated
the increase in budget deficits by governments globally would rise from 3.9% of global GDP in 2019 to
13.9% in 2020, as indicated in Figure 1.
Among developed economies, the fiscal deficit to GDP ratio is projected to rise from 3.3% in 2019 to
16.6% in 2020; the U.S. ratio is projected to rise from 6.3% to 23.8%. Developing economies’ ratio is
projected to rise from 4.9% to 10.6%.

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Figure 1. IMF Projected Government Budget Deficits (Fiscal Balances) Relative to GDP
In percentage shares of Gross Domestic Product

Source: World Economic Outlook Update. International Monetary Fund, June 24, 2020, p. 20. Created by CRS.
Notes: Data for 2020 are estimates.
Monetary Measures
Among central banks, the Federal Reserve has taken extraordinary steps to address the growing economic
effects of COVID-19, again effectively serving as the global lender of last resort, reflecting the role of the
dollar as the dominant global reserve currency. Similarly, other national central banks and monetary
authorities adopted a range of monetary and prudential measures (Table 2), although central banks lack
the policy measures to address the health crisis itself. Central banks initially provided liquidity through
changes in interest rates and bond-buying operations, including:
 Forward guidance;
 Lowering interest rates and reserve requirements;
 Announcing new lending and financing facilities;
 Expanding asset purchases;
 Extending foreign exchange swaps; and
 Relaxing some prudential measures, including capital buffers and, in some cases,
countercyclical capital buffers, adopted after the 2008-2009 financial crisis.
Central banks acted as a lender of last resort through lending to banks, but also as buyers or lenders of last
resort for private sector securities, in many cases engaging in activities previously considered off-limits.
Prudential Measures
Various central banks also engaged in prudential measures, or regulation and supervision to ensure the
soundness and adequacy of capital buffers of individual banks through capital requirements (micro
prudential) and financial regulations that address the stability and systemic risk of the financial system as
a whole (macroprudential). The Financial Stability Board (FSB) concluded that actions to date to support

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the global financial system have worked effectively to contain the financial and economic impact of the
pandemic, although the crisis is not yet over.
Table 1. Elements of Announced Fiscal Measures to Address COVID-19

Advanced Economies
Emerging Market Economies

Measures
US
JP
DE
FR
IT
ES
GB
BR
CN
ID
IN
KR
MX
RU
ZA
Measures supporting the health sector

x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
Measures supporting households

Targeted transfers a
x
x
x
x
x
x
x
x
x
x
x
x

x
x

Other labor income
x
x
x
x
x
x
x
x
x
x
x
x

x
x
support b

Wage subsidies
x
x
x
x
x
x
x
x
x

x
x

x
x

Tax cuts
x
x
x
x

x

x
x
x
x

x
x
Tax deferral
x
x
x

x
x
x

x
x
x

x
Measures supporting firms
Tax deferral
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
Liquidity support c
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
Tax cuts
x
x
x

x
x
x
x
x
x
x
x

x

Targeted transfers

x
x
x
x

x

x
x

x
x
Source: Annual Economic Report 2020, Bank for International Settlements, June 2020, p. 24, based on data col ected by the
International Monetary Fund and the Organization for Economic Cooperation and Development.
Notes: a. Includes cash and in-kind transfers to affected households. b. Extended unemployment and sick leave benefits. c.
Non-budgetary measures such as equity injections, asset purchases, loans and debt assumptions or government guarantees
and contingent liabilities, US: United States; JP: Japan; DE: Germany; FR: France; IT: Italy; ES: Spain; GB: Great Britain; BR:
Brazil; CN: China; ID: Indonesia; IN: India; KR: South Korea; MX: Mexico; RU: Russia; ZA: South Africa.

Table 2. Selected Central Bank and Prudential Measures to Address COVID-19

Advanced economies
Emerging market economies

Type of
Measures
US EA JP GB CA AU CH BR
CN ID IN KR MX TH ZA
tool

Interest
Policy rate cut
x

x
x
x

x
x
x
x
x
x
x
x
rate

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Lending
Gen. liquidity
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
liquidity
provision a

Specialized
x
x
x
x

x
x
x
x

x
x
x
x

lending

Asset
Government
x
x
x
x
x
x

x
x
x

x
x
purchases/ bonds
sales

Commercial
x
x
x
x
x

x

paper

Corporate
x
x
x
x
x

x

x

bonds

Other private

x
x

x

securities b

FX swap/
USD swap line

x
x
x
x
x
x
x

x
x

intervention FX

x
x

x
x
x
x

intervention

Prudential
Capital
x
x
x
x
x
x
x
x
x
x
x
x
x

x
rules and
requirements
regulations Liquidity
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x

requirements

Payout

x

x
x
x
x
x

x
x
x
x
x
x
restrictions

Market

x
x
x
x
x
x
x
x
x
x
x
x
x
x
functioning c

Source: Annual Economic Report 2020, Bank for International Settlements, June 2020, p. 23.
Notes: a. Repo and reverse repo operations, standing facilities, modified discount window and lower reserve requirement
ratio. b. Asset- and mortgage-backed securities, covered bonds and exchange-traded funds. c. Shortsel ing bans and circuit
breakers. US: United States; EA: Euro Area; JP: Japan; GB: Great Britain; CA: Canada; AU: Australia; CH: Switzerland; BR:
Brazil; CN: China; ID: Indonesia; IN: India; KR: South Korea; MX: Mexico; TH: Thailand; ZA: South Africa.

Author Information

James K. Jackson

Specialist in International Trade and Finance

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