COVID-19 and Macroeconomic Uncertainty: Fiscal and Monetary Policy Response

Lekha Chakraborty and Emmanuel Thomas in this working paper:

The macroeconomic uncertainty created by COVID-19 is hard to measure. The situation requires simultaneous policy interventions in terms of public health infrastructure, livelihood and humanitarian issues emanating from the interstate migration crisis. Although India has announced iteratively the policy measures, more fiscal–monetary policy coordination is required to scale up the policy responses to “whatever it takes” to respond to this crisis. Innovative sources of financing the deficit, including “money financing of fiscal programme”—a variant of helicopter money—can be a solution. Breaching the FRBM by raising the threshold deficit–GDP ratio from 3% is significant, with a clear “excessive deficit procedure road map” as the post-COVID-19 exit strategy. The government as the employer of last resort with effective rise in the existing wages could be an effective component of this policy.

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