The global fiscal response to COVID-19: Risks and repercussions

Governments around the world responded to the COVID19 crisis (CVC) by aggressively deploying fiscal policy to boost health expenditure, income transfers and increased welfare payments, as well as wage subsidies to firms to retain employees to minimize short term unemployment. A fiscal response was in principle both necessary and timely, but the nature of the responses adopted by governments differed markedly around the world. After describing the global macroeconomic impact of the CVC and its effect on budget deficits and public debt levels, this paper critically evaluates the global fiscal response with reference to comparable historical episodes. The analysis suggests some fiscal responses were too expansive and of the wrong form. The paper then highlights the future macroeconomic risks arising from the highly elevated public debt levels the CVC has caused, concluding that fiscal consolidation rather than further fiscal 'stimulus' will be needed to address the parlous fiscal legacy of the crisis.

https://www.sciencedirect.com/science/article/pii/S031359262030463X

QUESTION 1.

1.1 The 2008 Global Financial Crisis and the recent Covid-19 pandemic both had devastating economic impacts. Provide a detailed assessment of the transmission channels and impact these two external shocks had on the macro economy.

1.2 Critically discuss the global fiscal response to the COVID19 crisis (CVC) and its consequences on public finances.

QUESTION 2

Many emerging market countries rely on exchange rate stabilization policies to offset external shocks and facilitate trade. Notwithstanding the efforts by monetary authorities to achieve this objective, several emerging market currencies have depreciated substantially in the aftermath of the Covid-19 shock. Provide an in-depth discussion of the factors affecting the performance of currencies in emerging markets and the impact on their economies.