The world is in the grip of the COVID-19 pandemic and the ensuing Great Lockdown has pushed many countries into deep recessions—worse than during the 2008–09 global financial crisis. In response, governments and central banks all over the world have introduced strong discretionary (one-off and specific) fiscal and monetary measures to counteract the economic fallout caused by the spread of the coronavirus. Existing automatic stabilizers (such as income-based taxes and unemployment and household benefits), which differ across countries, have generally operated freely, providing some further cushion.
But with interest rates at record lows and public debts at historical highs in many countries, how can advanced economies best prepare for and respond to future downturns? Analysis in our recent World Economic Outlook completed before the pandemic looks at how advanced economies could build their resilience to negative shocks in such an environment. It finds that rules-based fiscal stimulus—where the stimulus is automatically triggered by deteriorating macroeconomic indicators—can be highly effective in countering a downturn under such conditions.
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