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Fiscal Policy during a Pandemic

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  • Miguel Faria-e-Castro

Abstract

I study the effects of the 2020 coronavirus outbreak in the United States and subsequent fiscal policy response in a nonlinear DSGE model. The pandemic is a shock to the utility of contact-intensive services that propagates to other sectors via general equilibrium, triggering a deep recession. I use a calibrated version of the model that matches the path of the US unemployment rate in 2020 to analyze different types of fiscal policies. I find that the pandemic shock changes the ranking of policy multipliers. Unemployment benefits are the most effective tool to stabilize income for borrowers, who are the hardest hit during a pandemic, while liquidity assistance programs are the most effective if the policy objective is to stabilize employment in the affected sector. I also study the effects of the $2.2 trillion CARES Act of 2020.

Suggested Citation

  • Miguel Faria-e-Castro, 2020. "Fiscal Policy during a Pandemic," Working Papers 2020-006, Federal Reserve Bank of St. Louis, revised Feb 2021.
  • Handle: RePEc:fip:fedlwp:87616
    DOI: 10.20955/wp.2020.006
    Note: Publisher DOI: https://doi.org/10.1016/j.jedc.2021.104088
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    More about this item

    Keywords

    fiscal policy; pandemic; COVID-19; CARES Act; nonlinear DSGE;
    All these keywords.

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • G01 - Financial Economics - - General - - - Financial Crises
    • H0 - Public Economics - - General

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