COVID-19 Requires Coordinated Global Policy Response
The impact on financial assets already exceeds prior crises, including that of the Global Financial Crisis (GFC)
The economic impact could be dire since consumers in lockdown around the globe
Coordinated response by the G20 necessary to combat the global adversary
Policy response has joined medical advice on the frontlines to counter the economic impact of the COVID-19 virus and we are encouraged to see vast sums under discussion in developed countries. Yet this crisis is different from past crises because many workers and consumers, the lifeblood of supply and demand, are restricted in their movement and, in some cases, are locked down. Brave, coordinated policy responses are needed to avoid a protracted recession and, ultimately, hasten recovery.
We got through many past economic and financial crises, and we shall overcome this crisis, too. Global policy measures have historically proven effective. Examples include the Baker Plan (1985) and the Brady Plan (1989), as well the quantitative easing programs of the GFC.
The COVID-19 crisis is unique and requires unprecedented global solidarity, cutting across public and private sectors. We need coordinated global policy responses – including fiscal and social measures as well as monetary and market policies – to prevent market dislocations, ensure liquidity, avoid panic-selling and stem extreme volatility spikes.
Previous Crises in Perspective
A comparison with previous crises provides helpful context. Macroeconomic crises typically can be categorised into currency crises (where currencies depreciate or get devalued), banking crises (where banks cannot meet their obligations) and debt crises (where countries cannot meet their sovereign debt obligations). In contrast, the COVID-19 is a medical and health care crisis.
The impact of COVID-19 on financial assets is already much larger than the impact in each of the 1987, 1998 and 2008 financial crises. Figure 1 shows the relative performance of equity and bond yields one month before and after a financial crisis.