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

Effectiveness of Monetary and Fiscal Policy in Mitigating Pandemic-Induced Macroeconomic Impacts
22 December 2023
Bhavesh Garg
COVID-19, Supply shock, monetary policy, fiscal policy

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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.

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