Question

we know that United States is at least using both monetary policy (by lowering the interest rate to be 0%) and fiscal policy (by having 2 trillion USD ready for spending on infrastructures). You have done the analysis for the fiscal policy. As for the monetary policy, it is similar in forcing an economic expansion but through the money market.

Given the current condition with the corona virus pandemic still ongoing, and the lockdown has not been lifted,

1. How successful do you think the monetary policy (only) would be? and why?
2. How successful do you think the fiscal policy (only) would be? and why?
3. How successful is the combination of both monetary policy and fiscal policy? and why?
4. Should the government consider quantitative easing? and why?

Answer 1

In order for the monetary policy to be successful banks need to lend to the people and resume their normal economic activity.

Most importantly economic activities in the country should return to the normal, unless that happens no amount of fiscal policy or monetary policy can fully bring normalcy or recovery in economic activities to the previous level which was before the virus hit the world.

However, bringing down interest rates to nearly zero, would ensure that the borrowing cost of capital is almost negligible which would incentivise people to take loans to expand their businesses and other such economic activities. But, as mentioned above, unless lockdown is fully lifted, monetary policy would not be able to make expected impact.

Similarly, fiscal policy of the government would definitely help economic activities to resume and its expansion but its full impact would be visible only when the lockdown is lifted.

Fiscal policy of government spending and tax reduction ensures more money in the hands of people which leads to economic expansion.

The combination of both fiscal policy and monetary policy could be very effective if all other parameters are in place.

However, in the current situation they can not be fully effective as economic activities remain sudued because of Covid-19.

Government has done fine by using both fiscal and monetary policy actions to nudge crumbling economic activities.

However, quantitative easing either won't be as effective as of now unless the lockdown has been lifted and normal economic activities have resumed.