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Effectiveness of Monetary and Fiscal Policy in Mitigating Pandemic-Induced Macroeconomic Impacts

Author

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  • Bhavesh Garg

    (Indian Institute of Technology Ropar, India)

Abstract

This paper employs a two-economy model, which incorporates New Keynesian features, to examine the impact of a coronavirus disease (COVID-19) induced supply shock on economic recovery in large net oil-importing Asian countries. It examines whether and to what extent monetary and fiscal policies are effective in mitigating such supply shock risks. Our calibrations and estimations reveal that a COVID-19 induced supply shock negatively impacted both the global and domestic economies alike and delayed their economic recovery. Specifically, shocks to total factor productivity and world output negatively affected domestic macroeconomic variables such as domestic output, inflation rate, interest rate, and government expenditure, amongst others. We show that monetary and fiscal policies efficiently mitigate the adverse effects arising from the supply shock.

Suggested Citation

  • Bhavesh Garg, 2023. "Effectiveness of Monetary and Fiscal Policy in Mitigating Pandemic-Induced Macroeconomic Impacts," Working Papers DP-2023-20, Economic Research Institute for ASEAN and East Asia (ERIA).
    • Handle: RePEc:era:wpaper:dp-2023-20
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    More about this item

    Keywords

    COVID-19; supply shock; two-economy model; NK-DSGE; monetary policy; fiscal policy;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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