E32 - Business Fluctuations; CyclesReturn

The paper focuses on the reactions of economic policy to external and internal shocks. It refers to the current economic situation caused by the COVID-19 pandemic that generated a combination of internal and external negative economic shock and an unprecedented termination of some sectors or industries. The aim of the paper is to observe the change in economic policy responses over the last decade by comparing a monetary and fiscal policy responses after the outbreak of the global financial crisis in 2008 with the current economic situation. Most of the observed states indicated faster and stronger reactions of economic policy during the COVID-19 pandemic in comparison to the global financial crisis. The change may be explained by the expectation of a larger economic downturn caused by an abnormal negative shock, however a possible transformation in the ability of the economic policy to react should be also considered as a conceivable reason. The dynamics of the responses was observed especially in the case of fiscal policy, which corresponds to the consensus of the authors of the literature.

The financial crises in 2007 and 2008 showed that pure FFR corrections are insufficient and are not providing the desired goals in the GDP evolution and the other macroeconomic indicators. FED had to buy out some financial institutions, because the financial sector was one of the most impacted sectors during the financial crises and this sector of the economy infected the real economy. Toxic asset buy outs and direct lending by FED were the best steps taken and even statistics is confirming it. Direct monetary base increase had the biggest impact on the GDP evolution. Bank liquidity replenishment allowed financing the investment projects and also consumption which is the biggest proportion of the US GDP. The US government effort to boost the economy by increasing government spending showed that this way of helping the economy was contra productive and with high risk impact into the budget deficit evolution. The government should aim its focus on investing or at least to support investment as much as possible; because investments are the only guarantee long-term positive GDP impact and employment growth.