Covid-19 Fiscal Support and its Effectiveness CAMA Working Paper 28/2021 March 2021

This paper uses a threshold-augmented Global VAR model to quantify the macroeconomic effects of countries’ discretionary fiscal actions in response to the Covid-19 pandemic and its fallout. Our results are threefold: (1) fiscal policy is playing a key role in mitigating the effects of the pandemic; (2) all else equal, countries that implemented larger fiscal support are expected to experience less output contractions; (3) emerging markets are also benefiting from the synchronized fiscal actions globally through the spillover channel and reduced financial market volatility. Abstract This paper uses a threshold-augmented Global VAR model to quantify the macroeconomic e⁄ects of countries(cid:146)discretionary (cid:133)scal actions in response to the Covid-19 pandemic and its fallout. Our results are threefold: (1) (cid:133)scal policy is playing a key role in mitigating the e⁄ects of the pandemic; (2) all else equal, countries that implemented larger (cid:133)scal support are expected to experience less output contractions; (3) emerging markets are also bene(cid:133)ting from the synchronized (cid:133)scal actions globally through the spillover channel and reduced (cid:133)nancial market volatility. a multiple and this impact may be ampli(cid:133)ed or damp-ened depending on countries(cid:146)economic structures. Country-speci(cid:133)c models include output growth, the change in cyclically-adjusted primary balance, the real exchange rate, as well as real equity prices and long-term interest rates when available. Our counterfactual results indicate that the quarter on quarter (QoQ) real GDP growth e⁄ects of discretionary spending and revenue measures in response to Covid-19 and its economic fallout vary across regions and countries, depending on country-speci(cid:133)c factors, cross-border spillovers, and the size and composition of policy support. Among advanced economies, we estimate that the e⁄ects are particularly large in the United States, Germany, and Canada with QoQ growth impact in 2020Q2 being 7.1, 7, and 6.2 percentage points, respectively. In the United States, substantial assistance to households, (cid:133)rms, and state and local governments is estimated to have prevented worse economic outcomes in 2020 but the risk of (cid:133)scal drag this year remains in the absence of additional (cid:133)scal support. The large and data-dependent (cid:133)scal support in Canada is estimated to mitigate the negative growth e⁄ects of the pandemic and facilitate the post-Covid recovery. Germany(cid:146)s (cid:133)scal packages(cid:151) focusing initially on healthcare infrastructure, households (through Kurzarbeit) and businesses, and subsequently on the recovery(cid:151) is estimated to support growth and contain job losses. While emerging markets and developing countries o⁄ered smaller (cid:133)scal packages to counter the health crisis and support the economy than advanced economies, our results show that the QoQ growth e⁄ects of such actions are sizable and magni(cid:133)ed by policy spillovers. Specif-ically, monetary and (cid:133)nancial sector policies in advanced economies have reduced global (cid:133)nancial volatility