While Covid-19 spreads its health losses throughout the World, forecasts regarding global economic growth are continuously revised at lower rates. As a reaction, the main international Central Banks, accompanying the FED, have performed a new coordinated cut-off cycle of their basic interest rates. Although some economists regard such a reaction as a powerful tool to counter the downturn of the global output and employment levels, others are asking rather for a fiscal impulse: a type of a new "coordinated and international public spending plan".
And you my colleagues, what are your opinion about this subject?
Interest rate reductions is to help businesses who have borrowed money to be able to pay a cheap interest payment on their loan principals. Government spending is needed to create a stimulus to boost the economy with private sector confidence battered by the virus.
Interest rate reductions is to help businesses who have borrowed money to be able to pay a cheap interest payment on their loan principals. Government spending is needed to create a stimulus to boost the economy with private sector confidence battered by the virus.
Dear Chung Fah, these combined monetary and fiscal policies seem to be a better response to the crisis, subject to the maintenance of long-term public solvency.
perhaps for consumption, for investments I have serious doubt.... have a look at the macroeconic model of www.cpb.nl called saffier II
Dear Jan Jansen, I agree, the postpone of investments is already occuring, and to lower financial costs is not enough to enhance private confidence. Thank you for the link.
As mentioned previously, interest rate cuts are mainly benefiting existing debt repayments and could possibly nudge indecisive investors/entrepreneurs. The problem with the current pandemic however is that private investors are at best reluctant to undertake medium and long term commitments. It is not the cost of money that affects investment decisions but the investors' perception of the current and future economic environment (animal spirits). I sense that fiscal policy is more appropriate right now perhaps even in the form of helicopter money.
I entirely agree with your perspective Bill Kolios. Furthermore, fiscal measures such as income tranfers, lower tax burden and subsidized credit should be mainly allocated into small business and low-income citizens.
In Brazil, several fiscal actions have been announced to countercyclically respond to the covid19 crisis. Finance authorities have proposed to postpone tax burden and labor tax and contributions; at the same time, firms were encouraged to cut labor's hours worked, giving more space for homework strategies and, as long as possible, maintaining employment levels - although possibly accompanied by proportional reduction in wages. To compensate it, Brazilian government is going to transfer income to them.
In turn, Brazil's Central Bank has changed basic nominal interest rate (Selic) down to its lower level in history (3.5% per year), and it tends to more cuts. It is noteworthy that in the recent few years Brazil has performed macroeconomic policies aligned to long-term fiscal solvency and inflationary stability. However, this depressive context surrounding covid19 has challenged economic authorities, thereby strongly asking for counter-cyclical and temporarily measures.
Another aspect of the current expansionary monetary policy, which I consider to be problematic, is that it assumes that the additional liquidity will support employment. The global supply chains support a very thin production line which is further strengthened by extremely flexible labour arrangements. I am therefore very sceptical that labour will benefit from the additional liquidity when it barely sees its income share increase under the current precarious employment conditions.
Dear Bill Kolios, undoubtedly , there will be several obstacles to sustain employment levels throughout economic sectors. Such flexible labor arrangements certainly will allow for a faster unemployment rate increase in come countries. On the other hand, this same flexible setup can avoid an extreme increase of the unemployment rate in other countries, depending on the magnitude of the possible wage and benefits cuts which are available into specific labor negotiations. In my view, it is very important that each national government decisively enter into coordinated negotiations with employers and employees so as to mitigate employment losses.
Dear Ricardo,
cheap money by itself stimulates the economy when it is growing. I think that in times of recession, monetary measures work effectively only with a sound fiscal policy. In this case, it is necessary to see the real magnitude of the economic damage globally.
Dear Yosifov, it seems to be the current case. A large fiscal impulse is already going on, lead by the main economies of the world.
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