Monetary and Fiscal Policy during the COVID-19 Pandemic

RePEc Short ID: pma339
ORCID iD: 0000-0001-5045-7998

Andolfatto, David; Martin, Fernando M.

doi:10.20955/wp.2025.004

Working Paper Revision

Monetary and Fiscal Policy during the COVID-19 Pandemic

Abstract: We study U.S. monetary and fiscal policy during the COVID-19 pandemic using a small-scale dynamic general equilibrium model calibrated to 2020–2024. The model is used to evaluate observed and counterfactual policies, emphasizing their distributional consequences. Without fiscal support, the pandemic would have imposed large welfare losses on adversely affected households and substantially increased welfare inequality. Fiscal transfers provided valuable social insurance, but exceeded the amount necessary to relax borrowing constraints. Optimal monetary policy calls for earlier tightening but cannot avoid the fiscal-induced increase in the price level. Strict inflation targeting reduces inflation only by imposing large welfare costs on unconstrained households.

JEL Classification: E40; E52; E60; E63; E65;

https://doi.org/10.20955/wp.2025.004