Policy report

Over the past decade since the Great Recession, structural factors within developed countries and throughout the global economy have resulted in persistently low interest rates—leaving it unclear how central banks would successfully provide monetary stimulus when the next recession hit. When the pandemic and resulting economic crisis emerged, central banks and governments across the world immediately instituted widespread monetary and fiscal stimulus measures, not just limited changes in interest rates, as many believed that the pandemic was a short-term shock and economies would bounce back in a 'V-shaped recovery.' Much of the provided stimulus was meant to be short-term, with expiration dates and funding caps. However, as the pandemic continues to wreak havoc well into 2021, some countries have amplified their stimulus programs and advanced their longer-term budget goals, while others have allowed politics to supersede needed stimulus. The varying degrees to which different economies have successfully achieved cross-institutional cooperation between central banks and federal governments will likely determine both how countries emerge from the pandemic in the short term and countries’ global competitiveness in the medium to long term.

This white paper aims to understand how varying economies have changed their monetary and fiscal policies to respond to the pandemic-induced economic crisis. Section II provides a background of the Federal Reserve’s dual mandate, Section III outlines major monetary policy tools the Fed has used during U.S. recessions, and Section IV discusses recent changes in the Fed’s monetary policy framework. Section V dives into variations in monetary and fiscal policy responses to the pandemic across several key economies: the United States, the European Union, Japan and South Korea. Section VI explores the implications of the United States’ response relative to other countries and how this presents a unique financial opportunity to invest in longer-term U.S. competitiveness.

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