In the face of a global pandemic, the like not seen for 100 years, governments around the world implemented measures to help stem the transmission of the coronavirus, including lockdowns. These actions shut down many sectors of the economy, especially those sectors involving human contact, such as accommodation and food services, arts and recreation services.

Many businesses were forced to close, causing workers to lose their jobs and receive lower income, pushing down aggregate demand in the process. This act of stopping an economy from functioning normally – by simply restricting the operating hours of some businesses – resulted in a multitude of shocks to both the demand and supply-sides of the economy.

The uncertainty, and to some extent, hysteria associated with the pandemic, created the impetus for governments and central banks to adopt a range of policy measures aimed at stabilising businesses and households. Some of these policy initiatives were new and novel, and therefore untried, while some were from the standard fiscal and monetary policy playbooks adopted in previous crises.

Key messages:

• With recent research into the post-COVID inflation surge showing supply plays a dominant role in driving inflation, it highlights the importance of monitoring closely the supply side of the economy and not discounting the possibility of a supply shock persisting.
• 'Quantitative easing' in action on its own is not inflationary, but it can become so if agents in the economy, including banks, households, firms, and governments are able and willing to respond to lower interest rates.
• Conventional and unconventional monetary policy responses enacted during the pandemic did have wealth distribution consequences that further exacerbated inequality in Australia largely based on property ownership.
• Fiscal support that is aligned with monetary policy stance can help avoid interest rates being too high and output going into deep contraction.