Investigating COVID-19 spillovers in the US economy with a dynamic CGE model

PurposeThe recent COVID-19 is forcing governments to implement policies on a large scale to counter its spread. A central issue in the economic debate is the effective quantification of the impact that the policies may implicitly have on the economy. This study quantifies the effects of lockdown in the United States.Design/methodology/approach The study uses a dynamic computable general equilibrium (DCGE) model calibrated on a social accounting matrix (SAM). The lockdown policy is applied on the supply side, by using a reduction in the production according to the closing time of each industry. The reduction in the demand is also applied, throughout the contraction of the household consumption that is diversified by the commodities. In order to analyse the pure effect of the lockdown policy, the interventions by the policy makers are not considered in this study.FindingsThe results show an important contraction of productivity in the food industry, the real estate activities, the constructions and the general services.Originality/valueThe contraction produces a fall of the GDP for the whole period analysed, traced by the investments, which includes repercussions on the whole productive system, employment and income of the institutional sectors.

Monetary-fiscal coordination: when, why and how?

Purpose This paper aims to revisit the theme of fiscal-monetary coordination in a general equilibrium setup that allows for unconventional monetary policy, monetary policy transmission and developing country characteristics. Design/methodology/approach This paper uses a calibrated new Keynesian dynamic stochastic general equilibrium (DSGE) model to study fiscal-monetary interaction. Findings Debt sits at the center of monetary-fiscal interaction. Under high-debt conditions, the inflation-output trade-off rises with an increase in the strictness with which monetary policy targets inflation, undermining the standard prescription of strict inflation targeting. At the same time, the transmission of monetary policy is also impeded, due to which unconventional monetary policy becomes more appropriate. The need for coordination among the policies gets enhanced in the presence of borrowing cost channel. While the presence of borrowing cost channel increases the need for policy coordination regardless of the debt situation, features like higher share of non-Ricardian households and weaker monetary policy transmission affect monetary-fiscal interaction to a greater extent under high-debt environment. Originality/value First, this paper uses inflation-output trade-off as a metric, to analyze fiscal-monetary interaction. Second, this paper considers the impact of developing country characteristics (such as a higher share of non-Ricardian households, impeded monetary policy transmission and supply constraints/borrowing cost channel) on fiscal-monetary interaction. Third, the DSGE model developed in this paper incorporates open market operations that could shed light on the role of unconventional monetary policy in the presence of high fiscal deficit and debt, which is particularly relevant in the current context of the COVID-19 pandemic. Fourth, the model also permits an investigation into monetary policy transmission under different debt regimes.