Macroeconomic implications of public policies in the pandemic-borne crisis

Abstract

Serbia and the world are facing the largest health-cum-financial crisis in the living memory. By utilizing the novel class of macroeconomic SIR models, we demonstrate that neither its origin nor its transmission is fully exogenous, but crucially depends on the complicated interaction of governments, firms and individuals? economic behavior. Hence, COVID-19 epidemics and provoked public health response exhibit profound economic and financial consequences that may well be mutually reinforcing. Paper dismisses neoliberal approach to pandemics, but also criticizes Serbian public policy as palliative and erroneously obsessed with amassing life-support machines. In fact, we argue that small open economies should focus on providing obligatory epidemiological gear and disinfectants to their population for public use while awaiting more effective medical treatment, especially after quarantines get called off. In terms of macroprudential policy and measures aimed at mitigating the economic crisis, even though reasonable at the onset, they would have to be fine-tuned and more sector specific as pandemics subsides. Instead of numerical guesswork with regards to the key macroeconomic stats, we inspected Serbian constellation in terms of likely growth trajectories without and with the second wave of contagion. From purely macroeconomic perspective, much depends upon the size and probability of capital flow reversals which so often additionally worsen the initial financial havoc. Thus, on top of conventional policy instruments, capital controls should play a greater role and must be deployed counter-intuitively to ongoing practice.