Question

Why fiscal and monetary policies unable to stop the contraction of the China economy in this pandemic? Does it mean fiscal and monetary policies are not useful in a health emergency?

Answer 1

Ans.
As the global economy slipped into recession due to pandemis, which held back the GDP in many countries , central banks world over and in China tried to help financial institutions cope by injecting huge amounts of money into their respective financial systems, raising the velocity denominator. The expectation is that subsequent GDP growth as economies and financial markets heal will bring velocity back to a more normal level and trend.
For policy makers, this situation create a very difficult policy choice. On the one side, they need to sustain the supply of money to help their respective economies cope with the after effects of the crisis. On the other side, they need ultimately to withdraw any monetary excess to preclude potential inflationary pressures.
Also many times fiscal policy and monetary police measures takes time to implement. Quite often, by the time stimulatory fiscal policy kicks in, the economy is already recovering. In the current economic crisis we have seen Corporate profits will decline, Commodity prices will decline,Interest rates will decline, Demand for credit decline , unemployment rising etc.,
Current crisis are not only health crisis but also liquidity and solvency crisis for many businesses.
So fiscal and monetary policies are useful in a health emergency but they will not show impact immediately and the impact will be seen only with a lag.