No. 623 - Policy mix during a pandemic crisis: a review of the debate on monetary and fiscal responses and the legacy for the future

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by Giuseppe Ferrero, Massimiliano Pisani and Martino TassoJune 2021

The paper reviews the recent literature on the macroeconomic effects of the Covid-19 shock and on the main policy responses of governments and central banks in the main advanced countries.

Monetary and fiscal measures avoided a liquidity crisis and limited the drop in demand. After the pandemic crisis is over, they should be withdrawn gradually. An accommodative monetary policy (consistent with price stability) and government budgets oriented towards investment are necessary. Once the recovery is firmly under way, those governments facing a large public debt should implement, gradually, plans to achieve primary budget surpluses. Expansionary measures in countries with more fiscal space will be able to promote the recovery.