Fiscal Supermultiplier and Endogenous Money in the United States: The COVID-19 Pandemic vs. the Global Financial Crisis

The paper examines different real-monetary dynamics and policy responses during the COVID-19 pandemic (C19P) and the Global Financial Crisis (GFC) in the United States through the lens of the Sraffian Supermultiplier model and the endogenous money approach. On the one hand, the C19P triggered a relatively deeper contraction in GDP, but its recovery was relatively faster and more robust. The ‘V’ shaped recovery from the C19P significantly contrasted the ‘L’ shaped trajectory of the post-GFC period. On the other hand, the money supply (M2) grew relatively more, and the monetary base expanded relatively less during the C19P. To explain these different real-monetary dynamics, a theoretical framework is developed and analyzed empirically for the United States. The theoretical model and the empirical analysis suggest that money supply is endogenously determined by creditworthy demand derived from the multiplier-accelerator effect of non-capacity generating autonomous demand, in which government spending plays a key role. Therefore, the absence of full hysteresis after the C19P shock had nothing to do with a traditional neoclassical trend reversal mechanism but with the fiscal supermultiplier effect of the extraordinary pandemic-related government spending.