Working Paper: NBER ID: w27461
Authors: Efraim Benmelech; Nitzan Tzurilan
Abstract: As countries around the world grapple with Covid-19, their economies are grinding to a halt. For the first time since the Great Depression both advanced economies and developing economies are in recession. Governments and central banks have responded to the pandemic and the economic crisis using both fiscal and monetary tools on a scale that the world has not witnessed before. This paper analyzes the determinants of fiscal and monetary policies during the Covid-19 crisis. We find that high-income countries announced larger fiscal policies than lower-income countries. We also find that a country’s credit rating is the most important determinant of its fiscal spending during the pandemic. High-income countries entered the crisis with historically low interest rates and as a result were more likely to use nonconventional monetary policy tools. These findings raise the concern that countries with poor credit histories – those with lower credit ratings and, in particular, lower-income countries – will not be able to deploy fiscal policy tools effectively during economic crises.
Keywords: Fiscal Policy; Monetary Policy; COVID-19; Credit Ratings; Economic Crisis
JEL Codes: E43; E44; E52; E62; E63; G01; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher credit rating (G51) | increased fiscal spending (E62) |
| high-income countries (O57) | larger fiscal policies (E62) |
| debt-to-GDP ratio (H68) | fiscal spending (E62) |
| low interest rates (E43) | nonconventional monetary policy tools (E52) |