Economic and Financial Policy Responses to the COVID-19 Pandemic: Review and Analysis

Abstract

One year ago, both the World Health Organization and the United States Secretary of Health and Human Services declared the outbreak of COVID-19 to be a public health emergency. Within weeks, confirmed cases were announced in Europe, Asia, and Latin America. Responses in the form of lockdowns, travel restrictions, widespread cancellation of events, facility and workplace closures, and agricultural disruption resulted in vast social and economic disruption. These disruptions led to stress and volatility in the financial markets and the largest global recession since the Great Depression. While regulatory measures instituted since the Great Financial Crisis have increased resiliency in the core of the financial system, the COVID-19 shocks nevertheless revealed systemic financial problems. The crisis also saw unprecedented intervention by central banks in the form of credit and liquidity facilities. Combined with additional fiscal and monetary policy responses, as well as regulatory intervention, the government responses reached truly unprecedented levels.

This paper provides a review and framework for policymakers, regulators and educators to evaluate the U.S. financial and economic policy responses undertaken in response to the COVID-19 pandemic. Then, it examines several critical areas of financial stability concern that were brought to light during the pandemic: stresses in central clearing counterparties, pre-emptive redemption of money market fund shares by investors in response to broaching of weekly liquid asset levels, and extreme dysfunction in credit and U.S. Treasury markets. Finally, this paper touches on the critical equity and financial inclusion impacts of COVID-19, as an area that deserves urgent attention and the full force of economic and financial policy.