The U.S Fiscal and Monetary Response to the COVID-19 Crisis : An Assessment of the Stabilization Policies’ Impact on the Long Term Economic Recovery

In this thesis we assess the U.S fiscal and monetary response to the COVID-19 crisis, and how these interventions have impacted the long term economic recovery. The broad range of policies implemented to counter the crisis have been analyzed through the lens of an extended AD/AS model. Following the record amount of fiscal stimuli we document an overweight of demandtargeted provisions, despite categorizing the pandemic as a real economy crisis triggered by a supply shock. We find evidence that the U.S economy has recovered faster than anticipated while the production is still operating below full capacity, a finding that raise concerns around the broad targeted fiscal packages. Furthermore, we describe risks in regards to the speed, scope and size of the monetary programs. We find evidence of the Federal Reserve being more established in financial markets and to a larger extent being engaged in the allocation of credit, resulting in an unprecedented growth in money supply. The Fed’s interventions contributes to increased inflationary pressure, supporting the our extended AD/AS model. Moreover, we employ the HP-filter to examine asset inflation and overheating in the economy. We find clear indications of inflated asset prices and a marginal positive output gap. The indications of asset inflation suggests increased financial instability, further indicating that the government has provided elusive stability. Furthermore, we find evidence of inflation in consumer goods running far above the inflation target in the United States. This inflation is argued to be persistent, creating a ripple effect that will harm businesses and households, who were the primary targets of the stabilization policy.nhhma