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1、Thinking Beyond thePandemic: MonetaryPolicy Challenges inthe Medium- to Long-TermMonetary Dialogue PapersMarch 20212. THE ECONOMIC CHARACTERISTICS OFTHE COVID-19 PANDEMICIn this chapter, we analyse the dynamics of the COVID-19 pandemic and its prospects (Section 2.1); the state of knowledge on the p
2、andemic, its management, and its economic repercussions (Section 2.2); the nature of the economic crisis caused by the pandemic and how it differs from previous crises, in particular, the global financial crisis (GFC) of 2007-2009 (Section 2.3); and its implications for monetary and fiscal policies
3、(Section 2.4).2.1. The dynamics of the COVID-19 pandemic and its prospectsTo understand the economic impact of the pandemic in the short and medium- to long-term, we must first analyse its actual and future dynamics.The first cases of the new COVID-19 infection were registered in the Chinese city of
4、 Wuhan in December 2019. In late February and early March 2020, it spread to Europe and the United States. A year later, at the time of writing this paper (February 2021), the figures for daily new cases and deaths worldwide (Figure 1) remain high. The figures were increasing rapidly until January 2
5、021. As of 11 February 2021, the total number of identified COVID-19 cases exceeded 108 million and total number of COVID-19- related deaths-2.3 millionSee Worldometers, Coronavirus cases, s: worldometers.irfo/coronavirus/.Figure 1: COVID-19 pandemic: daily new cases (left panel) and daily deaths (r
6、ight panel)in the world, in thousands, 2020-2021Source: Worldometers, s:/ worldometers.info/cor-oncvirus/.Predicting the pandemic/s dynamic towards the end of 2021 is a risky and highly speculative task, especially given the new mutations of COVID-19 (the so-called British, South African, Brazilian,
7、 and Californian ones - see Lancet COVID-19 Commission, 2021), which were identified at the end of 2020 and in early 2021. In such a situation, one cannot rule out new waves of high-intensity infections in 2021 and perhaps beyond.Throughout 2020, the availability of a vaccine was seen as the potenti
8、al turning point in fighting coronavirus. When several vaccines became available at the end 2020, it turned out that their production and distribution, as well as the vaccination process itself, would take a few years to cover the entire world population. According to the 日U (2021) forecast, only th
9、e EU, the United States, and a few smaller countries (Israel, United Arab Emirates, Bahrain, Singapore, Hong Kong, and Taiwan) have the chance to complete mass vaccination towards the end of 2021. In other regions of the world, vaccination will take more time, until 2023 and beyond (most of Africa).
10、 In such a situation, thinking about achieving herd immunity against COVID-19 is unrealistic (Dadush, 2021; Krueger, 2021), especially when the coronavirus is mutating.The available statistics confirm that the vaccination campaign is rolling out slowly, except from a few small countries (Israel, Uni
11、ted Arab Emirates, and Bahrain) and the United Kingdom (which outperforms both the United States and the EU) - see Figure 2.Figure 2: Cumulative COVID-19 vaccination doses administered per 100 people(logarithmic scale), 01.01.2021 11.02.2021Note: Counted as the number of single doses, which may not
12、be equal to the vaccinated individuals.Source: Our World in Data, Coronavirus vaccinations, s:ouuworldindata.orRcovid-vaccinations.The above overview suggests that the pandemic may not end quickly, and the world economy may have to operate in extraordinary circumstances for a longer period of time.2
13、.2. The limited state of knowledge on the COVID-19 pandemic, its impact on pandemic management, and economic activityDespite more than a year of experience in fighting the pandemic, the state of knowledge on its actual size, geographical spread, mechanisms of transmission, and effective containment
14、measures remains limited. In this section, we concentrate on those aspects of anti-pandemic management which have an explicit economic impact, leaving aside purely medical and public health problems.The uncertainty starts with the actual number of infections and even the number of COVID-19-related f
15、atalities. The reason for this is related not only to the imperfections of reporting systems in individual countries but also to difficulties in accurately diagnosing cases without a broad-based testing system, which is present in only a few countries. There is also a large number of asymptomatic ca
16、ses, especially in younger cohorts of the population, which are difficult to identify even with the help of broad-based testing systems. Therefore, one can speculate that the actual number of infections is a few times larger than what is officially recorded.An even more limited knowledge concerns th
17、e exact channels of disease contagion. While it was clear from the very beginning that keeping physical distance between people, limiting direct person-to- person contact, and using face masks can slow down the proliferation of the pandemic, these actions had to be translated into concrete protectio
18、n measures aimed at prohibiting or limiting various types of activities. In choosing concrete containment measures, knowledge on the factors facilitating the spread of coronavirus (for example, indoor versus outdoor activities, weather conditions, the seasonality of infections, and the role of schoo
19、ls, among others) plays a decisive role. However, such knowledge is either lacking or very limited and uncertain. Furthermore, there are difficulties explaining cross-country differences in the number of infections and deaths, which could help understand the factors responsible for the contagion and
20、 evaluate the effectiveness of various anti-pandemic strategies.The limited state of knowledge determines the policy responses to the crisis, which are based, in most cases, on trial and error. This approach is reflected in the stop-go policy carried out in most countries.The policy response began w
21、ith far-reaching and rather untargeted containment measures in most of Europe and the United StatesIn some East Asian countries (Japan, Taiwan, South Korea, Hong Kong, and Singapore) that had earlier experience with the SARS epidemic, authorities managed to launch a system of mass testing and tracki
22、ng infection chains with the use of IT technologies early on, avoiding more severe lockdown measures (Stancati and Yoon, 2020). at the end of the first quarter and beginning of the second quarter of 2020 with the hope that they would stop the spread of coronavirus and stop the pandemic in a relative
23、ly short period of time. When the huge economic costs of mass lockdowns became evident (GDP decline was positively correlated with stringency of containment measures - see IMF, 2020; Marcus et al., 2021) and the first wave of pandemic seemed to be over in several AEs (but not globally as seen in Fig
24、ure 1), governments began relaxing the lockdown measures at the end of the second and in the third quarter of 2020. Economic activity started to recover at a quite rapid pace in the third quarter of 2020 (IMF, 2021a).However, the return of the pandemic in the autumn of 2020 forced most governments t
25、o reintroduce lockdown measures, although in a more targeted way than in the spring of 2020. Since then, and until the time of writing this paper, the stringency of anti-pandemic measures fluctuates in most of AEs (see Hale et al. 2020) depending on the most recent infection and death statistics, pr
26、essure from sectoral lobbies, and the political controversies around anti-pandemic policies. One can say it is driven by attempting to balance socio-economic considerations and the capacity of national healthcare systems to deal with the pandemic (Dabrowski, 2020).While in the first half of 2020 mos
27、t countries enjoyed broad social and political consensus on the necessity to take tough containment measures, support began to wane at the end of 2020 and in early 2021 when the social and economic costs of the pandemic and lockdown continued to increase and doubts with respect to the effectiveness
28、of concrete anti-pandemic policies and measures intensified. It was seen, among others, in the course of the US presidential election campaign and in the series of anti-lockdown protests held in various countries. The most recent cases (mid-February) of political controversy on anti-pandemic measure
29、s include tension in the newly formed government of Italy (Amante, 2021) and the failure of the Czech parliament to prolong the state of emergency to fight the pandemic (Euronews, 2021).The limited state of pandemic-related knowledge additionally increases the already high degree of uncertainty in r
30、espect of the short- and medium-term economic prospects and the unpredictability of government decisions. Uncertainty and unpredictability dampen both private consumption (beyond basic necessities) and even more - investment.2.3. Characteristics of the COVID-19 economic crisisThe economic characteri
31、stics of the COVID-19 crisis are very different from the GFC of 2007-2009 and other past financial crises or business-cycle downturns. The GFC caused a disruption in financial intermediation, which, by its nature, had a deflationary character. There were also other deflationary factors in play such
32、as new, more stringent financial regulations, the effects of globalisation, and others (Dabrowski, 2019).The current crisis is a combination of demand-side and supply-side shocks. They result not only from depressed aggregate demand caused by the self-restrained behaviour of both consumers and inves
33、tors but also from administrative lockdown measures such as the prohibition of certain types of activities, restrictions on the movement of people, or closed borders and the resulting disruption of supply chains. In such circumstances, private spending decreases and private saving increases (Figure
34、3), but these are forced (involuntary) savings.One can make a historical analogy to centrally-planned economies where people and enterprises could not spend their money balances on the goods and services they wanted to buy because they were not available on the market (as a result of administrative
35、price controls and the administrative distribution of goods and services) - the phenomenon of a shortage economy as described by Komai (1980). This led to forced saving (flow) and monetary overhang (stock), which represented a repressed inflation (Cottarelli and Blejer, 1991).Apart from temporarily
36、frozen demand- and supply-side disruptions, the COVID-19 crisis, especially if prolonged, can lead to substantial structural changes such as the expansion of e-commerce and various e-services (including e-government ones), telework； teleconferencing, online education, and the contraction of business
37、 travel, traditional retailing, and, therefore, demand for office and commercial space. At the moment, it is difficult to predict which parts of the observed structural changes have a temporary character and will disappear after the pandemic and which have an irreversible character.Figure 3:Gross ho
38、usehold saving rate, in % of GDP, 2017-2020Source: Marcus et al., 2021.The right diagnosis of the ongoing structural changes is important not only for structural and institutional policies - for example, the respective adaptation of labour market regulations - but also for monetary and fiscal polici
39、es. First, they should facilitate such changes rather than conserving the existing supply side structure, which might mean support for zombie firms and industries. If one assumes far-reaching structural changes, estimating the output gap may become more complicated (i.e., due to the mismatch between
40、 the new demand structure and the old supply capacities).2.4. Crisis implications for monetary and fiscal policiesThe very nature of the GFC (see Section 2.3) required a bold monetary policy response to avoid a deflationary spiral of the kind observed during the Great Depression of 1929-1933. And be
41、cause interest rates in major currency areas quickly hit the zero bound, CBs had to resort to UPMs, including large-scale APPs. While expansionary monetary policies achieved their strategic goal (deflation was avoided), the process of withdrawal from UPMs in the second half of the 2010s either went
42、slow (the United States) or did not start at all (the euro area and Japan). The continuous fear of deflation and attempts to push inflation up to the declared 2%-or below but close to 2%-target were major reasons of this failure (Dabrowski, 2019).As a result, CBs in major currency areas met the new
43、COVID-19-related challenges with interest rates close to zero (the ECB and BoJ) or moderately positive (the Fed). Therefore, monetary relaxation required resorting to UPMs, mainly APPs.There is also a more fundamental question on which kind of monetary policy response has been required, given the sp
44、ecific character of the COVID-19 crisis analysed in Section 2.3, which is quite different from both the GFC and standard business cycle downturns. Indeed, the surprise outbreak ofthe pandemic and the far-reaching lockdown measures in the first half of 2020 caused a negative aggregate demand shock in
45、 parallel with a supply-side disruption. The increase in gross household saving (Figure 3) confirms the correctness of this diagnosis. CBs might also fear a potential disruption in financial intermediation as happened during the GFC, so providing additional liquidity seemed to be the right decision.
46、 However, once lockdown measures were relaxed in the third quarter of 2020 and then continued in a more selective way, the rationale behind the continued monetary expansion requires a closer analytical scrutiny. And this will be done in Chapter 3 of this paper.Given the nature of the COVID-19 crisis
47、, the main macroeconomic policy response should come from a fiscal policy side. Governments are confronted with the necessity to: finance the direct costs of fighting the pandemic (mostly related to public health measures);provide financial compensation to people and businesses directly affected by
48、the economic consequences of the administrative lockdown measures; and accommodate for revenue losses and additional social spending resulting from the crisis-related recession (automatic fiscal stabilisers).This is the minimum agenda of a fiscal response. On top of this, several governments develop
49、ed various fiscal stimulus packages aimed at boosting aggregate demand or stimulating public investment programmes (Skidelsky, 2021). The design of these packages differs between countries (IMF, 2021b).The basic constraint comes from the limited fiscal space in most AEs (Table 1). Their fiscal positions substantially deteriorated during the GFC and immediately after (Dabrowski, 2012) and only a few of them (Germany is the most prominent example) managed to use the post-GFC period