In the fight against the COVID-19 pandemic, economists, economic policymakers, and bodies like the G7 should humbly acknowledge that “all appropriate tools” imply, above all, those wielded by medical practitioners and epidemiologists. Coordination, autonomy, and transparency must be the watchwords.
BERKELEY – Last week, G7 finance ministers and central bank governors vowed to use “all appropriate policy tools” to contain the economic threat posed by the COVID-19 coronavirus. The question left unanswered is what is appropriate, and what will work.
The immediate response took the form of central bank rate cuts, with the US Federal Reserve fast off the mark. Though central banks can move quickly, however, it is not clear how much they can do, given that interest rates are already at rock-bottom levels. In any case, the Fed’s failure to coordinate its rate cut with other major central banks sent a negative signal about the coherence of the response.
Moreover, monetary policy can’t mend broken supply chains. My colleague Brad DeLong has tried to convince me that an injection of central bank liquidity can help get global container traffic moving again, as it did in 2008. (Now you know the kind of elevator conversations we have at UC Berkeley.) But the problem in 2008 was disruptions to the flow of finance, which central banks’ liquidity injections could repair.