COVID-19 and Fiscal–Monetary Policy Coordination

Against the backdrop of the COVID-19 pandemic, the economic stimulus packages announced by the national government are analysed and an attempt is made to identify the plausible fiscal and monetary policy coordination. When credit-linked economic stimulus packages are partial in its impact on growth recovery, an accommodative fiscal policy stance in the forthcoming Union Budget 2022–23 is crucial for the economy.

Views are personal.

This is the abridged version of the paper presented at the International Institute of Public Finance meetings at the University of Iceland, Reykjavik on 18 August 2021. The authors would like to acknowledge the valuable comments from Miriam Muting, the discussant of the paper at the conference. Thanks are also due to Andreas Haufler and Hoang Ha Nguyen Thi for their useful comments.

Globally, there is a growing concern about the tendency of segregating the monetary and fiscal policy while assessing the macroeconomic impact of deficits on economic growth outcomes. In the times of the COVID-19 pandemic, if the path towards fiscal consolidation is through public expenditure cuts than tax buoyancy, it can adversely affect the growth recovery.

We argue in the article that when liquidity infusion has limitations in stimulating economic recovery, high levels of deficit can be substantiated by enhancing public investment, especially in health and capital infrastructure, as it is a dual crisis—a public health crisis and a macroeconomic crisis. It is not only the levels of deficit that matter, the financing of deficits is also equally significant in times of crisis. Any normalisation procedure announcement in the forthcoming Union Budget 2022–23 to roll back the economic stimulus packages can adversely affect the economic growth recovery.