Chapter 2: Fiscal and Monetary Consequences of Covid-19

The consequence of Covid-19 has been a simultaneous shock to demand and output, as governments imposed lockdowns in order to contain the spread of the pandemic and avoid the possibility of hospitals and medical facilities becoming overburdened. Governments responded to the shocks with a broad range of stimulus measures, as well as targeted spending on health equipment and research, at a time when the reduction in economic activity drastically cut tax revenue. At the same time, monetary authorities all over the world, including the European Central Bank (ECB), responded with a wide range of extraordinary accommodative measures. A European peculiarity has been the extent of the support given through loans and guarantees to businesses hit by the lockdowns. In both fiscal and monetary action, the old rule books were thrown out. There has been an intellectual shift, and (fiscal) austerity is now a dirty word. There is little dispute that the overall policy response was necessary in order to prevent much wider collateral damage from the virus and the epidemiologically necessary shut-down operations.