Economic Policies for the COVID-19 Pandemic: Lessons from the Great Recession

This chapter provides possible policies for overcoming the economic effects of the current COVID-19 pandemic on the light of the mistakes and achievements of the Great Recession (2007–2009). It can be useful to policy makers, providing theoretical and empirical evidence of the effects of monetary policy on lending behavior and banking crises in a context of a deep economic crisis where policy makers might avoid its expansion to a banking crunch. The work also focuses on the mechanisms and channels of monetary transmission to financial cracks. The impact of monetary policy on credit raises the likelihood of a banking crisis, both in quantities and in prices. According to our results, there is at least one channel of monetary transmission to prevent crisis, via bank capitalization. Our estimations show the monetary policy of the previous years to the Great Recession implicated an increase in the risk of a banking crunch, with interferences among financial and economic variables, in contrast to the Great Moderation, without any interference. Results show that currently, in the post-COVID era, but also in the Between-Crises period (2010–2020), there have been such interferences again, even more than previously. Finally, policy implications for the current crisis are also provided.