Prospects and Policies for Global Sustainable Recovery: Promoting Environmental and Economic Sustainability 3031192559, 9783031192555

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INTERNATIONAL PAPERS IN POLITICAL ECONOMY

Prospects and Policies for Global Sustainable Recovery Promoting Environmental and Economic Sustainability Edited by

ph i l i p a r e s t i s m a l col m s aw y e r

International Papers in Political Economy

Series Editors Philip Arestis University of the Basque Country Leioa, Spain Malcolm Sawyer University of Leeds Leeds, UK

This series consists of an annual volume with a single theme. The objective of the IPPE is the publication of papers dealing with important topics within the broad framework of Political Economy. The original series of International Papers in Political Economy started in 1993, until the new series began in 2005, and was published in the form of three issues a year with each issue containing a single extensive paper. Information on the old series and back copies can be obtained from the editors: Philip Arestis ([email protected]) and Malcolm Sawyer (e-mail: [email protected]).

Philip Arestis  •  Malcolm Sawyer Editors

Prospects and Policies for Global Sustainable Recovery Promoting Environmental and Economic Sustainability

Editors Philip Arestis Centre for Economic and Public Policy University of Cambridge Cambridge, UK

Malcolm Sawyer Emeritus Professor of Economics, University of Leeds LEEDS, UK

ISSN 1353-1158     ISSN 2634-4955 (electronic) International Papers in Political Economy ISBN 978-3-031-19255-5    ISBN 978-3-031-19256-2 (eBook) https://doi.org/10.1007/978-3-031-19256-2 © The Editor(s) (if applicable) and The Author(s), under exclusive licence to Springer Nature Switzerland AG 2023 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and ­transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Palgrave Macmillan imprint is published by the registered company Springer Nature Switzerland AG. The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

Preface

This is the nineteenth volume of the series of International Papers in Political Economy (IPPE). This series consists of an annual volume with relevant papers on a single theme. The objective of the IPPE is the publication of papers dealing with important topics within the broad framework of political economy. The original series of International Papers in Political Economy started in 1993 until the new series began in 2005 and was published in the form of three issues a year with each issue containing a single extensive paper. Information on the old series and back copies can be obtained from the editors: Philip Arestis and Malcolm Sawyer. The theme of this nineteenth volume is ‘Prospects and Policies for Global Sustainable Recovery’. The two global crises of the past 15 years (global financial crises 2007/2009 and COVID-19 pandemic 2020/2022) not only have had severe economic and social impacts but have brought to the fore major questions on the role of markets, of the State and of social cohesion. The climate emergency confronts us all with increasing intensity and the need for urgent and effective actions. Societies are scarred by high levels of inequality. The purpose of this volume is to overview the prospects for a sustainable future, and the policies, which would be supportive of environmental sustainability. The policy perspectives covered include the funding and financing of investment to confront the

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climate emergency; enhancing productivity and technical innovation to aid sustainability; the significance of the commons in the context of the state, the corporation, labour markets, and finance; lessons from feminist economics for a socially sustainable recovery; and macroeconomic policies to underpin sustainability. Cambridge, UK Leeds, UK 

Philip Arestis Malcolm Sawyer

Contents

1 The  Recent Global Crises and Economic Policies for Future Durable Recovery  1 Philip Arestis and Nikolaos Karagiannis 2 State  Capitalism, Government, and Central Bank Responses to Covid-19 41 Bernadette Louise Halili and Carlos Rodriguez Gonzalez 3 Law  and (Un)Sustainability in the Age of the Anthropocene 91 Simon Deakin 4 Re-thinking  Macroeconomics After the Covid-19 Pandemic133 Yiannis Kitromilides 5 Productivity,  Innovation and Sustainability173 Jonathan Michie

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6 Combining  Short-Term Economic Recovery with LongTerm Sustainability215 Unnada Chewpreecha, Hector Pollitt, and Jean-Francois Mercure 7 Creating  Local Sustainability Transitions: Finance, Citizen Participation and the Multi-scalar Governance Challenges of Municipal Energy Transition265 Helen Traill and Andrew Cumbers I ndex309

Notes on Contributors

Philip Arestis  is Professor and director of Research in the Department of Land Economy at the Cambridge Centre for Economics and Public Policy, University of Cambridge, UK; Professor of Economics in the Department of Applied Economics V at Universidad Del País Vasco, Spain; Distinguished Adjunct Professor of Economics in the Department of Economics at the University of Utah, USA; a research associate at Levy Economics Institute, New York, USA; and is appointed as a senior research fellow at the Centre for Data Analytics for Finance and Macroeconomics (DAFM), King’s College London Business School, UK. He was awarded the British Hispanic Foundation ‘Queen Victoria Eugenia’ Award (2009–2010) and the ‘homage’ prize for his contribution to the spread of Keynesian economics in Brazil by the Brazilian Keynesian Association (AKB), 15 August 2013. He was also honoured through the Thomas Divine Award of the Association for Social Economics (ASE). The award was given at the meeting of the ASSA, Philadelphia, USA, at the annual meeting of 4–6 January 2018. He served as Chief Academic Adviser to the UK Government Economic Service (GES) on Professional Developments in Economics (2005–2013). He has written widely in academic journals, a number of books and chapters in edited books. He is on the editorial board of a number of economic journals.

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Unnada Chewpreecha  is the principal economic modeller at Cambridge Econometrics, UK. She has over 16 years of experience in the development and application of the E3ME model, a large-scale global energy-­ environment-­economy (E3) model, as well as custom-made country-specific E3 models for Thailand, India, Brazil, Kosovo and the USA. Her expertise is in the application and development of E3ME and other E3 models to provide macroeconomic analysis of the climate, energy and resource efficiency policies. Topics that she covers range from carbon pricing, Nationally Determined Contribution (NDC) and Long Term Strategies (LTS) targets, 1.5 °C target, green recovery, energy efficiency, circular economy, green technologies, green jobs, climate risks, environmental tax reform, just transition, climate finance, border tax adjustment and many more. She recently provided modelling inputs for the European Commission’s official impact assessments ‘Stepping Up Europe’s 2030 Climate Ambition’. In 2022, she joined the G20 Climate Sustainability Working Group to provide modelling inputs on the study ‘Stocktaking of Economic, Social, and Environmental Impacts of Sustainable Recovery, Including Impacts on NDC Implementation’. Unnada regularly runs E3ME and macroeconomic modelling training courses for audiences around the world. Her written contributions range from policy briefs, book chapters, technical reports and academic papers. Andrew Cumbers  is Professor of Political Economy at the University of Glasgow, UK, and writes extensively on urban and regional development. His recent interests have focused on economic democracy, public ownership and alternative economic strategies. He is principal investigator for the project ‘Global Remunicipalisation and the Post-Neoliberal Turn’ funded by the European Research Council and has received funding from the European Commission, ESRC and Joseph Rowntree Foundation. He is a managing editor of the journal Urban Studies, has served on the editorial board of Work, Employment and Society and is on the editorial board of Competition and Change. His books include Reclaiming Public Ownership: Making Space for Economic Democracy, which won the 2015 Myrdal Prize from the European Association of Evolutionary Political Economy, and The Case for Economic Democracy. He has held visiting professorships at the Universities of Cologne and Frankfurt and the

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Leibniz Institute for Urban and Regional Planning in Berlin and is a visiting professor at the University of Bonn. Outside academia, Cumbers has worked with the Labour Party and the trade union movement, including Public Services International, the Transnational Institute and the Democracy Collaborative, developing and advocating new forms of democratic public ownership. Simon Deakin is Professor of Law and director of the Centre for Business Research at Cambridge University, UK. He specialises in the study of labour, private and company law from an interdisciplinary and empirical perspective, drawing on political economy and institutional theory. He has contributed to the theory of legal evolution and to the study of law from a social-ontological perspective. His books include The Law of the Labour Market: Industrialization, Employment and Legal Evolution (2005, with Frank Wilkinson) and Hedge Fund Activism in Japan: The Limits of Shareholder Primacy (2012, with John Buchanan and Dominic Heesang Chai). He is the co-author of the Cambridge Leximetric Datasets, a resource, which codes changes in labour and company laws around the world over several decades. He has recently been an investigator on ESRC-funded projects exploring the relationship between law and development, in the course of which he carried out fieldwork in China, Russia, South Africa and India. He is currently carrying out research on the impact of digital technologies in labour markets and legal systems and is part of the POPBACK project, which is looking at the origins and likely trajectory of populist challenges to the rule of law in Europe and beyond. Bernadette Louise Halili  is a PhD student in Economic Integration at the University of the Basque Country (UPV/EHU), Bilbao, Spain. Her research interests are interdisciplinary in nature and span the areas of political economy, comparative capitalism, institutions and applied macroeconometrics. Her doctoral thesis takes an actor-centred and non-­ Western-­ centric approach to comparative political economy (CPE) through the role of country-level institutions in influencing macroeconomic outcomes such as national income, international finance and macroeconomic policy in emerging markets. She is interested in considering the roles of the society, the market and the state as economic actors using

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theoretical and empirical methods in comparative institutional analysis that conceptualise and operationalise macro-level institutional settings in a novel way. The geographic scope of her research focuses on emerging markets, particularly on member states of the Association of Southeast Asian Nations (ASEAN). Her recent work on health determinants of academic performance across Filipino schoolchildren and on institutional determinants of levels of outward Chinese foreign direct investment across Asian economies has been published in journals such as European Journal of Sustainable Development and Eurasian Geography and Economics. Nikolaos Karagiannis is Professor of Economics at Winston-Salem State University, North Carolina, USA; a research scholar at the Global Institute for Sustainable Prosperity; an invited visiting scholar at the University of Cambridge, England; and the co-editor of the American Review of Political Economy. He has written extensively in the areas of economic development, public sector economics and macroeconomic policy analysis. He is particularly interested in developmental state theory and policy and has examined the transferability and applicability of this view in different contexts. He is the author, co-author and co-­editor of 23 books (one is forthcoming) and has written over 160 papers as refereed journal articles, book chapters and op-eds. His latest books include Europe in Crisis: Problems, Challenges, and Alternative Perspectives (co-­ editor, 2015), The Modern Caribbean Economy (2 volumes, co-editor, 2016), The Caribbean Economies in an Era of Free Trade (reissued, co-­ editor, 2017), Caribbean Realities and Endogenous Sustainability (co-­ editor, 2018), A Modern Guide to State Intervention: Economic Policies for Growth and Sustainability (co-editor, 2019), The Economic Rise of China: Multidisciplinary Perspectives (co-editor, 2022) and Visions and Strategies for a Sustainable Economy: Theoretical and Policy Alternatives (co-­ editor, 2022). Yiannis Kitromilides  is an associate member of the Cambridge Centre of Economic and Public Policy in the Department of Land Economy at the University of Cambridge, UK. Previously he taught at the University of Greenwich, the University of Westminster, the University of Middlesex and the School of Oriental and African Studies, University of London. The focus of his teaching and his main research interests have been and

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still are in the areas of European monetary integration, reform of banking, economics of climate change and the political economy of economic policymaking. He has written papers in journals, has contributed to edited books and has written books. His most recent publications include papers on the political economy of the austerity strategy, Greece and the Eurozone crisis, technocracy and public policymaking, political economy aspects of ‘Brexit’ (his most recent published paper is on this aspect) and the EU and the UK after ‘Brexit’ from a political economy dimension. In November 2021, he delivered a lecture as an invited speaker to the Cyprus Economic Society to coincide with the CO26 meeting in Glasgow on the subject of the political economy of climate change policy since the publication of the Stern Report on the Economics of Climate Change. Jean-Francois Mercure  is Associate Professor of Climate Change Policy and assistant director for Policy Impact in the Department of Geography at the Global Systems Institute, University of Exeter, UK. He is also a research fellow in the Department of Land Economy at the Cambridge Centre for Energy, Environment and Natural Resources Governance (C-EENRG), University of Cambridge, UK. He is the director of the UK BEIS and CIFF-funded Economics of Energy Innovation and System Transitions project for climate policy research in Brazil, China, India, the UK and the EU. He is a research affiliate at Cambridge Econometrics Ltd, Cambridge, UK. He has led the project ‘Timescales and Investment Dynamics in the Economy’ as part of the Rebuilding Macroeconomics programme. He recently wrote a textbook titled Complexity Economics for Environmental Governance; he was the contributing author on the Sixth Assessment Report of the IPCC, work group III. He co-authored the report for COP26 titled ‘The New Economics of Innovation and Transition: Evaluating Opportunities and Risks’. His articles include ‘Reframing Incentives for Climate Policy Action’, Nature Energy, with co-authors and ‘Risk-­Opportunity Analysis for Transformative Policy Design and Appraisal’, Global Environmental Change, with co-authors. Jonathan Michie has since 2008 been Professor of Innovation and Knowledge Exchange, and President of Kellogg College, at the University of Oxford, UK. Before returning to Oxford, he was director of the Business School at the University of Birmingham, and before that, he

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held the Sainsbury Chair of Management at Birkbeck College, University of London, where he was Head of the School of Management and Organisational Psychology. Previously, he was at the Judge Business School, Cambridge, where he was also a fellow and director of Studies in Economics at Robinson College, and a research associate of the ESRC Centre for Business Research. He moved to academia from Brussels, where he was an expert to the European Commission. Michie became Chair of the UK’s Universities Association for Lifelong Learning (UALL) in May 2020. He is the Managing Editor of the International Review of Applied Economics, was joint secretary of the 2019 Centenary Commission on Adult Education and was an ‘interdisciplinary’ panel member for Management and Business in the UK’s Research Excellence Framework (REF) 2021 exercise. Michie is a fellow of the Academy of Social Sciences, on whose Council he served for six years, and was awarded an OBE for services to Education. Hector Pollitt  is a senior economist at the World Bank, focusing on climate change. He is also a research fellow at the Centre for Environment, Energy and Natural Resource Governance at the University of Cambridge, UK. Prior to joining the World Bank, he was the chief economist at Cambridge Econometrics, where he worked on and developed the E3ME macro-econometric model, one of the world’s most advanced macroeconomic models. Over a period of nearly two decades working at Cambridge Econometrics, he produced numerous model-based analyses of climate and energy policy that fed into European Commission official policy assessments. He has also worked with several international organisations to explore policy options to promote sustainable development and regularly review other modelling exercises for policymakers. Hector’s research work focuses on the intersection between post-Keynesian and complexity economics. He has particular interest in the dynamics of economic growth and ­development, with a focus on innovation and transformational change, all within the system boundaries set by the natural world. Working with his regular co-authors, he has written research articles in several top-­tier climate change journals, including on post-COVID-19 economic recovery. He has co-edited two books that explore policies to promote sustainable development in East Asia.

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Carlos Rodriguez Gonzalez  is Professor of Applied Economics in the Department of Public Policies and Economic History at the University of the Basque Country, Spain. He teaches economic policy at the undergraduate level and international economics at the master’s level in the Faculty of Economics and Business. He has been teaching also as an invited professor for several years at the University of Lyon III (Institut d’Administration des Entreprises), France. He has taken part in many research projects. He is a member of a research group on ‘Institutions, Regulation and Economic Policy’. In the past, he was also a member of the European Union project ‘Financialisation, Economy, Society and Sustainable Development’. His main research topics belong to international economics (international trade and the multinational enterprise), economic policy (monetary policy) and political economy (growth models and comparative political economy). He has written extensively in ranked journals such as International Business Studies, Open Economies, the Journal of Transnational Corporations, International Finance, the Journal of Post Keynesian Economics and more recently Eurasian Geography and Economics. He has also written several chapters in different books and co-edited two books for Palgrave Macmillan. Malcolm Sawyer  is Emeritus Professor of Economics at the University of Leeds, UK, and FMM Fellow. He was the lead coordinator for the EU-funded 8 million euro, 15-partner, five-year project on Financialisation Economy Society and Sustainable Development (www.fessud.org). He was the managing editor of International Review of Applied Economics for over 30 years and has served on a range of editorial boards. He is the editor of the book series New Directions in Modern Economics and co-edits (with Philip Arestis) the annual International Papers in Political Economy (Palgrave Macmillan). He is the author of 13 books including The Economics of Michał Kalecki (Palgrave Macmillan) and most recently Financialization: Economic and Social Impacts. He has edited or co-edited over 30 books. He has written over 150 papers in refereed journals and contributed over 170 book chapters on a wide range of topics including financialisation, the Eurozone, fiscal policies and alternatives to austerity, money, public-private partnerships and Kalecki and Kaleckian economics.

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Helen Traill  is Lecturer in Political Economy and Sustainability at the Adam Smith Business School, the University of Glasgow, UK, where she has worked since 2019. Helen Traill’s current work spans sustainability tran­sitions across food and energy, with a concern for everyday lived realities of sustainable life. This includes work on the EU Horizon 2020 funded MPOWER project on municipal action for energy transitions, and a recent Scottish Government- and EU-Social Innovation Fund project on the ethics of sustainability in areas of urban deprivation, which won a Scottish Knowledge Exchange Award in 2020. Helen Traill holds a PhD in Sociology from the London School of Economics and Political Science, which explored community growing projects and their relation to urban land politics and practices of communality. This ethnographic work underpins a forthcoming book with Bristol University Press on The Practice of Urban Escape: Politics, Justice and Community in Urban Growing Projects. Helen Traill is an ECR committee member of the Royal Geographical Society’s Food Geographies Working Group and attends meetings of the Glasgow Food Policy Partnership. Her research interests span community and belonging, the politics of land ownership and the social life of sustainability.

List of Figures

Fig. 2.1 Economic and health outcomes in ASEAN-5 and OECD in 2020. (Source: Authors’ own construction) 64 Fig. 2.2 Correlation between pandemic restrictions and progression in 2020. (Source: Authors’ own construction) 66 Fig. 6.1 The E3ME model. (Source: E3ME, Cambridge Econometrics) 226 Fig. 6.2 Green recovery impacts, % differences from baseline. (Source(s): E3ME, Cambridge Econometrics. Note(s): CO2 includes energy-related and processed emissions) 228 Fig. 6.3 The innovation chain. (Source(s): The Economics of Energy Innovation and System Transition EEIST (2021)) 232 Fig. 6.4 Global CO2 to 2050, GtCO2. (Source(s): E3ME, Cambridge Econometrics)237 Fig. 6.5 Impacts on global GDP (% differences from baseline) and employment (millions jobs differences from baseline). (Source(s): E3ME, Cambridge Econometrics) 244 Fig. 6.6 Global CO2 (energy and processed), GtCO2. (Source(s): E3ME, Cambridge Econometrics) 245 Fig. 6.7 Net-zero GDP impacts in major world regions, % differences from baseline. (Source(s): E3ME, Cambridge Econometrics) 246

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List of Tables

Table 2.1 Indicators, definitions, theoretical justifications, and sources of explanatory variables 62 Table 2.2 Determinants of extraordinary fiscal and monetary response in Quarter 2 of 2020 71 Table 2.3 Determinants of income support from Quarter 2 to Quarter 4 of 2020 73 Table 2.4 Determinants of quantitative easing from Quarter 2 to Quarter 4 of 2020 75 Table 6.1 Global power generation, road transport, heating and steel making technology mix in the baseline and the green recovery scenario (percentage share) 234 Table 7.1 National distribution of high-ranking municipalities 281

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1 The Recent Global Crises and Economic Policies for Future Durable Recovery Philip Arestis and Nikolaos Karagiannis

1 Introduction The Covid-19, when the world economies suffered from a GDP contraction, was followed by recovery at the beginning of 2021. The economic outlook, though, remained uncertain due to risks of Covid-19 pandemic, financial uncertainties and the expected gradual removal of monetary accommodation. Recovery policies are urgently needed so that a strong long-term and durable recovery emerges. Fiscal, monetary and financial stability, policies, along with coordination of them, are important.

P. Arestis (*) University of Cambridge, Cambridge, UK University of Basque Country UPV/EHU, Bilbo, Spain e-mail: [email protected] N. Karagiannis Winston-Salem State University, Winston-Salem, NC, USA © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 P. Arestis, M. Sawyer (eds.), Prospects and Policies for Global Sustainable Recovery, International Papers in Political Economy, https://doi.org/10.1007/978-3-031-19256-2_1

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Coordinated policies should focus on increasing productivity of the work force, increasing wages without inflation and reducing inequalities. The rich countries’ demand increased due to the easing of Covid-19 lockdowns and expansionary monetary and fiscal policies. Aggregate demand expanded, but supply constrains could not meet demand. Companies were raising wages to attract workers, due to the pandemic-­ driven labour shortages; temporary expansion of unemployment benefits were introduced. In the USA, in September 2021, workers leaving their jobs for better opportunities elsewhere peaked at 4.4 m according to the Bureau of Labour Statistics. In October 2021, some US businesses were prepared to extend weekly working hours to seven-day week, which helped to enhance supplies (Financial Times, 14 October 2021). Supply shortages is a serious problem in the UK; business have faced a slowdown, with labour shortages being the main reason (a million fewer workers than at the beginning of Covid-19). Exports have also been significantly reduced, in view of Brexit and the Covid-19 syndrome. In the European Monetary Union (EMU), business expanded due to no initial labour shortages; the service sector in the EMU expanded the strongest over the last 15 years. More recently, EMU companies have difficulties finding enough workers to meet rising demand, along with shortages of equipment and raw materials. Consequently, EMU companies struggle to keep up with increased demand, thereby prices of goods and services increased. Rising energy prices is another impact on the EMU, and the UK, inflation, in view of shortfalls in gas supplies. Travel restrictions, due to the Covid-19 pandemic, and uncertainty that produces delays in investment projects have not helped supply to meet demand. In view of all these problems in the USA, UK and EMU, upward pressure on inflation emerged. In the EMU, inflation rose to 5% in December 2021 due to soaring energy prices, restricted supply, high demand and Covid-19. The ECB governing council at its meeting on 09 September 2021 decided to reduce the pace of its €80bn Quantitative Easing (QE) per month at ‘a moderately lower pace’ and ‘step-by-step’ reduction, but not pursue tapering, with its interest rate left unchanged. The Fed would start tapering its $120bn-a-month purchase of assets, when meeting its inflation target and the maximum of employment; the Fed’s Federal Open Market

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Committee (FOMC), at its 22 September 2021 meeting, confirmed it. However, on 04 November 2021, the Fed began its tapering, in view of higher inflation. The frequent statement, the words until now, by the Fed Chair that inflation pose a ‘severe threat’ to recovery implies that the Fed would increase its interest rate. The Fed Chair, after the 26 January 2022 FOMC meeting, signalled that in March 2022 the federal funds rate will be raised, shrink its bond buying to fight inflation and cool the fastgrowing US economy. The US consumer price index (CPI) increased annually to 7.9% in February 2022, from 7.5% in January 2022, the fastest increase since 1982, due to supply constraints, labour shortages and strong spending. The Bank of England’s (BoE’s) Monetary Policy Committee (MPC), at its 22 September 2021 meeting, decided on no change of its monetary policies, being in a ‘wait and see’ inflation-mode. Inflation in the UK was 5.4% in December 2021, with wage rate at 3.8%, according to the Office of National Statistics (ONS; reported on 18 January 2022), due to rising food prices and energy costs. US, UK and EMU Central Bankers warned that supply shortages would last longer than expected (Financial Times, 30 September 2021). Policies are required, but not suppressing demand, which would be counterproductive; enhancing supply is what is needed. Supply disruptions produce slow recoveries, and these are the main drivers of the emerging inflation. Higher interest rates would not reduce inflation, since central banks are ill-equipped to influence supply. Business investment is appropriate, but it does not respond to low interest rates when expectations do not help. Fiscal policy, through capital spending, lower VAT on energy and taxing the profits of energy providers (Befinger, 2022), is a way forward, along with monetary policy coordination. The OECD’s forecast of world economic growth by the end of 2022 of 4.4% would bring GDP in most countries back to pre-pandemic levels. The OECD (Financial Times, 02 December 2021) increased its inflation forecasts for the G20 countries because of the Omicron coronavirus variant, from 3.9% to 4.4% in 2022. The OECD advised governments to stimulus packages of investment. At the beginning of the Covid-19 pandemic, Central Banks around the world decided to keep low interest rates, which had been lowered during the Global Financial Crisis (GFC)

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and continued with Covid-19. However, with the economies rebuilding, after lifting pandemic restrictions, inflation emerged, along with a debate as to whether to end the QE, the relevant precursor of higher interest rates. Initially, the ECB was reluctant to introduce the QE scheme, unlike the BoE and the Fed. In fact, the ECB introduced its QE in 2015, while the other two Central Banks had already undertaken their QE schemes. The ECB reduced its interest rate after the collapse of the Lehman Brothers (September 2008), but increased it in 2011; started reducing it at the end of 2011 to 0% in March 2016, and introduced negative deposit rate in June 2014. The BoE and the Fed reduced their interest rates at the beginning of the GFC and continued so subsequently. Such monetary policies easing should increase the demand for loans, but if economies suffer from poor expectations of economic activity, demand is lacking. Proper coordination of monetary with fiscal policies is necessary. This contribution focuses on recent economic developments in the USA, the UK and the EMU. Economic policies pursued in these countries over the GFC and Covid-19 are discussed. This would propose that coordination of relevant policies is the best way for future durable economic recovery. After this introduction, we discuss recent and current economic developments and economic policies, followed by our proposal of proper coordination of policies. Finally, we summarise and conclude.

2 Economic Developments and Economic Policies Recent Developments Economic policies stimulated the economies over the Covid-19 pandemic to a greater extent than over the GFC. The GFC emerged due to the financial sector’s speculative activities. The Covid-19 was a natural disaster. Monetary policy was helpful, and fiscal policy, introduced only late in the GFC, helped to prevent the emerged recession from a depression. However, fiscal austerity, introduced in 2010, did not help. Fiscal policy helped the relevant economies at the outset of the Covid-19

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pandemic. Monetary policies also helped the financial systems. The role of Central Banks as ‘lenders of last resort’ helped the GFC; the Central Banks’ intervention restored the financial sectors from the problems that had emerged and caused the GFC. Over the Covid-19, lose monetary policies helped the financial markets to provide liquidity to the private sector. Fiscal policies helped greatly the recoveries. Financial stability policies, changes of banks’ reserve requirements, for example, helped. The US President’s March-2021 proposal for $1.9tn stimulus package and $1.2tn infrastructure plan helped economic activity. On 11 August 2021, the Senate voted the $1.2tn infrastructure plan, including fixing roads, rail networks, improve broadband provisions, support climate-­ change schemes, investment in education and housing. The House of Representatives approved the $1.9tn on 24 August 2021. The House considered the $1.2tn infrastructure bill at the end of September 2021 and passed it on 05 November 2021. The President signed the bipartisan infrastructure bill into law, and he also proposed a new social spending bill for $1.75tn, $555bn of it was for clean-energy investments. Much of the rest was on childcare, health care for the poor and the elderly. The House of Representatives passed this bill on 17 November 2021, but the Senate has not yet. The IMF (2021a) expects global GDP to be 4.4% for 2022, in relation to 5.9% in 2021; and 3.8% in 2023. The IMF’s managing director, Gopinath (2021), confirms that “We estimate the pandemic has reduced per capita incomes in advanced economies by 2.8 percent a year, relative to pre-pandemic trends” (p. 2). In a speech (24 April 2022), she warned that global forecasts for 2022 and 2023 are downgraded in view of the Covid-19 and the Ukraine war.1 Economic recovery emerged due to governments’ expansionary fiscal policies, and accommodative monetary policies, after abandoning the 2010 austerity. Inflationary pressures emerged in 2021, due to economies returning to business after the Covid-19 relaxation of relevant restrictions. Central Bankers of the USA, UK and EMU argued that the  The OECD’s forecasts for the UK’s economic growth (08 June 2022, reported in the Financial Times, 09 June 2022) are worst amongst the G20 countries, except Russia’s, and highest inflation amongst the G7 countries, until 2024, due to high inflation, energy inflation, rising interest rates, increasing taxes, low investment and productivity. 1

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inflationary pressures would be temporary. The BoE Governor (Bailey, 2021) suggested the recovery should not be risked by premature tightening of monetary policy. However, at the G30 meeting of Central Bankers (17 October 2021), the Governor suggested that the BoE would have to act to curb inflation (Financial Times, 18 October 2021). The BoE would probably raise its interest rates before it finishes its QE programme, and faster than the ECB and the Fed, due to the Covid-19 pandemic and Brexit. Coordination of economic policies is vital under such circumstances. The BoE’s MPC, at its meetings on 4 November 2021, decided to leave its interest rate and QE unchanged. The Governor of the BoE suggested that the evolution of the labour market would be ‘crucial’ to the interest rate increase. The reason the BoE was not prepared to raise interest rates was due to the expectation that GDP would weaken in early 2022. In the US, UK and EMU, due to fast rising energy prices and supply constraints, high inflation would persist. Reducing demand, for example, by increasing interest rates and enlarging supply through fiscal action can tackle inflation.2 Central Bankers voiced inflation fears, with inflation lasting longer than expected; they would proceed with tightening policies. The ECB’s approach to rising inflation, though, is in contrast to the Fed’s and BoE’s, which have signalled tightening their policies. The UK annual CPI rose to 5.5% (January 2022), driven by household energy bills. This put pressure on the BoE to examine the extent to which tightening of its monetary policy is appropriate (reported by the ONS, 17 November 2021). The BoE Chief Economist, Huw Pill, in his speech at the Confederation of British Industry on 26 November 2021, suggested that if the labour market continued to be strong, interest rates would have to increase and inflation would decrease. However, he suggested that in view of the economic uncertainty, the BoE could not decide on whether and when interest rates increase. This depends on how the economy performs, thereby a step-by-step cautious approach to policy is required.  Central Banks cannot control supply-side inflation. If Central Banks ignore it, problems arise. The ECB raised its rates in 2008 and 2011, in view of supply-side factors, which worsened the Great Recession. Increase in interest rates would not prevent inflation increasing, since energy shocks increase. Higher interest rates destabilise the economy. 2

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The labour-market shortages in the UK, USA and EMU imply unit labour costs rising, especially so in the USA (reported in the Financial Times, 02 February 2022). In the UK, labour shortages are due to Brexit, with foreign workers leaving the country, and the tough immigration rules, which left companies short of workers; some companies are short of 20% of staff. Job vacancies in the UK increased in the three months to July 2021, as the labour market rebounded from the Covid-19 pandemic; unemployment fell to 4.7% (the ONS, 17 August 2021), which supported wage increases. In August 2021, unemployment in the UK fell to 4.6% (the ONS, 14 September 2021). However, there was then lack of workers, implying that there are not enough workers, rather than not enough jobs. The Governor of the BoE repeatedly reported that the members of the MPC were careful of the outlook of inflation, and if signs of persistent inflation emerged, the Bank was prepared to employ relevant monetary policies. Broadbent (2021), the Deputy Governor of the BoE, in a speech (22 July 2021), suggested that in view of emerging wage growth policy-­ makers should pay close attention. However, “in the past, the UK labour market has often proved sufficiently flexible to absorb shocks, and reallocate resources—for example after the GFC—without a significant and lasting effect on the NAIRU, or on wage growth” (Broadbent, 2021, p. 20). Still, Broadbent (op. cit., p. 21) suggested that the MPC should be looking at the demand and pay close attention to the labour market. The Governor of the BoE (Bailey, 2021), suggested, “During the Covid crisis, we have seen a simultaneous and substantial fall in both demand and supply. But, all the indications are that for both demand and supply the decline will be temporary” (p. 1). This is so, since Covid-19 does not destroy long-run economic capacity; and where the recovery in demand exceeds supply, it is possible that this difference is temporary. However, the Governor suggested both the UK demand and supply will continue to recover. Two members of the MPC (Ramsden, 2021; Saunders, 2021) suggested that UK inflation needed to be tackled, and monetary policy should be tightened early due to the rising inflation. This would take three years to produce a balanced demand and supply and inflation to come down to 2% (Saunders, 2021). Haskel (2021) distanced himself

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from Ramsden (2021) and Saunders (2021) and argued that there was no need to remove the BoE stimulus, despite rising inflation. The response of the Governor of the BoE was that the MPC could sell back government bonds before increasing the Bank’s main interest rate. However, in terms of when and how precisely the MPC would act so, its response at the 05 August 2021 meeting was ‘some modest tightening’ of its monetary policy in view of relevant forecasts that inflation would rise to 4% by the end of 2021, to be transitory. This expected rise of inflation compares to its previous forecast of 3%, as the economy rebounded from the Covid-19 pandemic slowdown (the Committee forecasted inflation to be 3.3% in 2022, 2.3% in 2023 and 1.9% by the middle of 2014). The forecast of 4% inflation was due to supply being behind demand and labour shortages. The Committee put the labour market at the centre of its judgement, was concerned about wage inflation and prepared to monitor closely potential wage pressures. The Committee also indicated that with unemployment having peaked, allowed it to begin discussing raising interest rates gradually, in order to keep inflation at its 2% target. The committee, though, kept its interest rate unchanged and decided to continue with its QE at £150bn until the end of 2021. However, at its meeting on 05 August 2021, the Committee provided guidance of what to undertake when changes were required, and how to unwind the QE plan, namely to pursue QE tightening so that the interest rate reached 0.5% and the BoE would then stop reinvesting bonds that mature. After the rate of interest reached 1.5%, selling of bonds would be undertaken. Clearly, the main policy tool of the BoE remained its interest rate. The UK inflation experience is similar to that of the USA, where the annual rate of inflation of 5.4% emerged in June 2021, due to the lifting of the Covid-19 pandemic restrictions, causing demand to exceed supply. Inflation would fade as supply reached demand (due to the policies of the President) and workers returned to the labour force, thereby reducing pressures on wages and inflation. Additionally, the US Treasury Secretary suggested that inflation in the USA was transitory (Financial Times, 02 November 2021). Inflation in the EMU was more modest than in the UK and the USA. It was in the EMU, in June 2021, 1.9% (higher inflation rates emerged later in 2021, but not as high as in the UK and USA).

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This could be due to the EMU being behind the UK and the USA in terms of opening its economy from the Covid-19 pandemic. These developments put monetary policy-makers into a dilemma. Should they attempt to fight inflation or continue to expect it ‘transient’? Either decision has its problems for Central Banks. If they are right about ‘transient’ inflation, they risk increasing the rate of interest unnecessarily. If inflation became a serious problem and jeopardised recovery, other policies, like fiscal policy, would be necessary. The Central Banks of the UK, the USA and the EMU were firm on ‘transient’ inflation, but they suggested that if data in the future indicated that policies were needed, monetary policies would be undertaken. Relevant data (Financial Times, 31 July 2021) showed that the lifting of lockdowns in the EMU produced a growth rate of 2% in the three months to June 2021, with unemployment falling to 7.7% from 7.9% in May 2021. Subsequently, business and consumer confidence rebounded strongly, and retail sales reached their pre-Covid-19 levels. Supply constraints pushed CPI inflation to 4.9% in November 2021, up from 1.9% in June 2021, and above the 2% ECB inflation target. The ECB expected inflation to drop back to its target in 2022. However, the EMU was at a critical stage from the point of view of its labour market, because companies lacked ‘skilled labour’. The US Department of Commerce reported that GDP rose 1.6% in the second quarter from the first quarter of 2021, accelerated to 6.9% in the final quarter of 2021 (aided by consumer spending). Strong gains in the second half of the year due to increased demand, which outstripped supply, in view of economic stimulus and poor supply, thereby caused inflation. Similarly, in the UK and EMU, with increased demand there being more modest. House prices in the three countries rose substantially. However, the USA’s increase in house prices was not as dangerous as in the pre-GFC that led to the GFC; the US housing lending was not as responsible as in the case of the GFC (mortgage debt is currently around 65% of household income, compared with roughly 100% in 2007 [Financial Times, 25 June 2022]). Strong housing demand in view of cheap borrowing, low mortgage rates and limited supply increased house prices to record highs, but that increase was expected to slow by the mid-2022. Also, in the UK, due to high inflation, slowing GDP and

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rising mortgage rates (Financial Times, 19 May 2022). US consumers were facing rising prices, because of their increased spending, due to the fiscal stimulus and employment growth. Household finances were in their best shape for decades; the personal saving rate at 26.9% in March 2021 was reduced to 9.4% by August 2021 (Financial Times, 02 August 2021). Low interest rates and QE produced higher prices, especially housing prices, than boosting investment. In the EU, the ECB warned (Financial Stability Review, 25 May 2022) that house prices there were due for correction in view of rising interest rates due to higher inflation. The US President, on 28 May 2021, proposed $6tr budget proposal— highest federal government spending, in relation to GDP, since World War II. The package included two initiatives, the American Jobs Plan and the American Families Plan. The President’s infrastructure part of his proposal was of two parts. One would be devoted to roads, bridges, broadband fibre, ports, airports, water facilities, climate, building rehabilitation, an electric-vehicle charging network and other necessary investments that the private sector was poorly placed and unwilling to make. The other was on child benefits, universal pre-school, paid family leave and subsidies for childcare and community college. The ‘Cornwall Consensus’, an advisory memo circulated in view of the G7 meeting on 11–13 June 2021 in Cornwall, UK, should have accounted and taken on board the supply chains in addition to other considerations. Climate groups were also disappointed because of luck of specific plans for climate change. Climate-change plans are a global requirement since climate change is a global thread, which requires national plans for climate changes. Climate plans to reduce the net global carbon emission to zero by 2050, limit global warming to achieve a 1.5 °C limit and climate finance are three aspects of the main issues of the November 2021 Conference of Parties (COP26) meeting in Glasgow, Scotland.3 At the end of the meeting (13 of November 2021), despite disagreements in terms of how to approach the goal of reducing global warmings to 1.5 °C, countries agreed to keep the limit to 1.5 °C global heating. More progress, however, is necessary in view of the disagreements on cutting  G20 representatives had preliminary talks at a meeting in Rome, before joining another 100 heads of governments on 01 November 2021 in Scotland, for the COP26 climate change talks. 3

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greenhouse gas emissions by 2030, and other disagreements, which will be discussed at the 2022 COP27 meeting in Egypt. Climate change is likely to influence disproportionately the people at the bottom of inequality. Relevant policies are necessary, and countries should submit fresh and ambitious commitments. The UN’s Intergovernmental Panel on Climate Change (IPCC) landmark report (published on 09 August 2021) supports the suggestion for relevant policies. Governments should play a key role in this respect, and countries’ collaboration is vital. Developed countries should raise the $100bn a-year commitment to help developing countries to manage climate changes. Governments are actually under pressure to take action on climate plans. Barnett et  al. (2021) suggest that in climate economics some authors “have emphasized uncertainty in the climate system’s dynamics and how this uncertainty could create fat-tailed distributions of potential damages” (p. 1). Barnett et al. (op. cit.) conclude that these uncertain considerations should be of ‘first-order concerns’, and not ignored. Climate change may affect financial stability if banks are exposed to assets whose values are influenced by climate change. When monetary policy is involved with climate change, the independence of Central Banks should be abandoned, and Central bank policies should go beyond inflation targeting. Coordination of monetary and fiscal policies should be “supportive and consistent with government policies on environmentally sustainability and climate change” (Sawyer, 2022, p. 16). Relevant policies should include ‘green QE’ in terms of asset purchases from companies with appropriate green considerations; also capital requirements on bank lending, based on climate criteria. Central Banks should support governments’ relevant policies on climate change (Bartholomew & Diggle, 2021). Central Banks’ climate policies are not substitutes of governments’ climate policies, but complements. The financial sector should focus on allocating funds to environmentally friendly investments (Fontana & Sawyer, 2014). The US economy is recovering from the pandemic more quickly than policy-makers expected, and more than in the UK and EMU. The May 2021 US unemployment rate fell to 5.4% from 6.1% in April 2021, implying that the shortage of workers, which contained the US economic recovery, was eased, in response to the President’s fiscal stimulus, with

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average hourly earnings increased. This leaves the US economy short by 7.6m jobs of the pre-Covid-19 syndrome. Economic growth has rebounded, with the US recovery producing output above the pre-­ Covid-­19 pandemic. However, in August 2021 the created number of jobs experienced a sharp decline. That was due to the Delta-coronavirus syndrome, which produced negative effects on hiring. In January 2022, 467,000 jobs were added despite the surge of omicron. The Fed expectation was that inflation was temporary, implying that dealing with monetary policy depended on evidence rather than on forecasts. This policy provided greater clarity, but long-term uncertainties remained. Demand was increasing, with the supply-side responding insufficiently. Inflation, as in May 2021, increased annually by 3.9%, faster than had been expected. Supply did not meet increased demand. The President’s plan, based on infrastructure investments, did not include all the elements as in the original proposal, since the President reduced his plan to attract votes at the Senate from the Republicans. The Senate voted on 28 July 2021 to begin work on the $1.2tn national infrastructure plan, after weeks of prolonged negotiations. This is a step forward for the US President’s economic agenda in terms of his plan to inject government investments over the next decade to reshape further and rejuvenate the US economy. The relevant bill passed by the Senate and the House of Representatives on 06 November 2021 should help increase supply. The Fed expects the increase in inflation to be transitory. The US President stated on 19 July 2021 that his administration believed that the rising inflation would not hurt his proposed spending plans; the inflation pressures would ease, but he does not underestimate potential risks. The President expects the Fed to take necessary action, and not acting prematurely, which is a mistake. The Fed needs to see ‘substantial further progresses’ with its goals, before tapering. The FOMC, at its July 2021 meeting, declared that its main interest rate was kept close to zero, and the monthly QE of $120bn would continue until ‘substantial progress’ emerged in the economic recovery. The 10-year Treasury yields dropped, with corporate bond yields also declining. At the FOMC June 2021 meeting, there was a consensus that interest rates would be maintained until 2023 (and lifted twice by the end of 2023), not 2024 as it was suggested at the FOMC meeting in March 2021, but only if stronger

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recovery emerged. However, the Fed begun talks in terms of reducing its $120bn QE, but only until ‘substantial further economic recovery’ emerged. The expectation on GDP was that it would be 7% in 2021, and 3.3% in 2022, with unemployment dropping at 3.8% by the end of 2022 from 5.8% in May 2021. Expected inflation, 3% in 2021, and falling to 2.1% in 2022. The inflation rate was above the 2% target; the Fed’s maximum employment target was not met either. The Fed Chair informed the House of Representatives, on 15 July 2021, of the risk of higher inflation than expected, and there were tools to address it, but the Fed did not wish to use them unnecessarily, which would interrupt the economy’s growth. The Vice-Chair of the Fed, at his speech at the Peterson Institute for International Economics on 04 August 2021, suggested that the Fed’s $120bn QE would be reduced, and its interest rate would be increased in 2023. This was so, in this view, because the economy was moving towards the Fed’s target of full employment and the 2% average inflation target. At the Jackson Hole meeting of Central Bank governors, on 27 August 2021, the Fed chair suggested that the Fed aimed to scale back the QE in the coming months. This was due to the US labour market moving towards maximum employment, one of the two targets of the Fed, and the inflation target was with ‘clear progress’. The President spoke of the dangers of acting too soon. However, the Fed’s FOMC, at its meeting on 03 November 2021, decided to begin tapering its monthly $120bn QE, $10bn of Treasury bills and $5bn of mortgage-backed securities, ending its QE in mid-2022. A change of the Fed’s rate of interest would be undertaken, when ‘substantial further achievement’ emerged of its two targets of inflation averaging 2%, and maximum employment. In terms of the supply-side of the cause of inflation, he stated that the Fed did not have appropriate tools to tackle it. There is the possibility that domestic supply will increase to catch up with demand, since the President’s strategy contains a mix of supply-side investment and demand support. US government bonds were sold in view of these developments with the interest rate on the benchmark 10-year Treasuries increasing by 0.08% to 1.47%. However, the Treasury yields fell later, reaching 1.32%, due to expectations that the economic rebound would decelerate, and the Fed would lose its control of current

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inflation. High demand of Treasuries emerged, thereby increasing their prices and reducing their yields. Treasury bond yields are low in the UK and EMU, not just in the USA. One explanation may be due to Central Banks’ QE. However, after November 2020, no new QE announcements emerged. The reason why such decisions were undertaken was that the economic situation was fragile, thereby taking precise decisions was not possible. In the first quarter of 2021, the long-term yields rose relative to the short-term ones, thereby steepening the yield curve (the difference between long-term and short-­ term Treasury interest rates). The gap was 0.82% and three months later increased to 1.58%, due mainly to increases in the long-term yields. This was due to the US fiscal expansion. A lot of that steepening was subsequently reversed. Early April 2021 the yield curve flattened because short-term yields increased in view of the markets pricing in the prospect that the Fed would raise interest rates in 2022. By the middle of June 2021, the 10-year yield fell to 1.5% and the 30-year yield also fell. This could also be due to the uncertainty of the infrastructure project of the President. In the UK, however, expectations that the BoE would increase its interest rates in December 2021, in view of policy-makers signalling alarm over inflation, pushed the 10-year Treasury yields to their highest level since March 2019 at 1.2%. Countries failed to increase aggregate investment and demand, in relation to GDP, for decades. The labour’s bargaining position declined due to the reduction of trade unions’ membership. The weaker bargaining power of labour and the more unproductive unskilled workers produced a declining Natural Rate of Unemployment (NRU), which produced a more horizontal Phillips curve (Goodhart & Pradhan, 2020, p. 71; see, also, Stansbury & Summers, 2020). Deflationary forces were very aggressive that caused inflation to remain below the 2% inflation target of Central Banks until the beginning of the Covid-19 pandemic (Goodhart & Pradhan, 2020, pp. 4-6). In June 2021, the US President reached a deal with a bipartisan group of senators, worth $1.2tr, for more spending on infrastructure. This infrastructure would produce new investments in social and climate changes, paid by taxes on wealthy and corporations; it included spending on roads, bridges, broadband ports and airports. This fell short of the

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President’s March 2021 plan. Congress and the House approved this agreement; the stimulus deal would follow the $1.9tr stimulus deal approved in March 2021. If implemented fully, this stimulus would produce durable recovery. Policy coordination with the Fed should help greatly. The US commerce department’s annual core personal-­ consumption expenditure (PCE) index rose 3.1% in April 2021. This was a significant increase, when compared with the 1.9% increase in March 2011 (Financial Times, 20 August 2021). The Fed officials expected that the fiscal stimulus, causing the rise in inflation, was transient; thereby the inflation was likely to fall back. The UK’s inflation was 2.1% in May 2021, slightly above the BoE’s 2% inflation target. The MPC of the BoE at its June 2021 meeting kept the official interest rate at 0.1% and the QE at £895bn until the end of 2021—same decision at its 04 August 2022 meeting. The UK House of Lords (2021) published a report on QE suggesting that it had not done much for growth, in terms of consumer spending and investment. It also increased wealth inequalities and created new risks for the public finances. The BoE needed to explain why it was pressing ahead with its QE, and interest rate at 0.1%, when GDP was recovering and when there is higher inflation. If the BoE did not respond on this issue, it would be very difficult to respond properly later (see, also, Haldane, 2021). Inflation according to this report would increase further and substantially, since it coincided with a growing economy, enlarged government expenditure, high levels of personal savings, which enhanced personal spending after the removal of Covid-19 restrictions, shortages of commodities and supply constraints. The BoE was under the danger of losing its credibility, and undermining its independence, if it did not act on its monetary policy to promote price stability. The BoE rejected those criticisms. House prices in the UK, USA and EMU were booming, which would sustain inflation, and raise the possibility of financial instability. Low interest rates, increases of savings in view of the lockdowns and desire of more space since people worked from home were the main reasons for the booming house prices. Policy-makers were aware of the relevant risks for financial instability and were prepared to take relevant policy action to avoid this kind of problems. However, raising interest rates to control

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house prices risked producing unemployment and affecting negatively living standards. Labour shortages are another concern of policy-makers. In the UK, USA and EMU, companies had difficulties finding workers (The Economist, 29 June 2021), thereby the wage growth accelerated. This may be transitory, but policy-makers should pay attention to these developments, which could lead to higher inflation. Nevertheless, there was no serious need to worry then, since those labour shortages could be temporary. This was due to increases in unemployment benefits provided in the USA, EMU and UK, and the furlough schemes.4 The end of these schemes may cause problems. In the case of the furlough scheme there was the question of how many employees could go back to their jobs. The BoE predicted that in the UK unemployment at 4.7% in April 2021 would only rise slightly to 5.5% in the third quarter of 2021. The end of the furlough scheme would show the strength of the labour market and the state of unemployment. The end of the furlough scheme caused companies to suffer from shortages seriously. This may be due to lack of skills for jobs where demand was growing; also, many workers may have dropped out of the labour market during the Covid-19. However, the end of the UK furlough scheme generated not much unemployment, as the Governor of the BoE clearly reported to the House of Commons Treasury Committee (Financial Times, 16 November 2021). UK jobs grew after the furlough scheme, and unemployment fell to 4.3% (November 2021), lower than had been expected after the furlough. The Covid-19 pandemic increased the wealth distribution for the wealthy. Income and wealth inequality in the USA, the UK and the EMU is measured as the ratio of the top 10% to the bottom 90% deteriorated (Goodhart & Pradhan, 2020, p. 7). Since the GFC, worsening income  Following the March 2020 Covid-19 pandemic spread, these countries introduced the furlough scheme. In the USA, an income-protection scheme was introduced. In the UK and EMU, the focus was keeping workers employed. Governments covered 80% of the wage bill for furloughed employees. In the UK, and from 01 July 2021, employers contributed 10% of wages to the furloughed workers, with the government contribution falling to 70%. As from 01 August 2021, the employers’ contribution rose to 20%. That scheme ended in September 2021. Subsequently, the UK government unveiled a £500m fund to support the people leaving the furlough scheme, older workers and poor households in the winter of 2021. In the EMU, the scheme was to last for longer (The Economist, 07 August 2021). 4

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inequality occurred, due to declining trade union membership, implying weaker bargaining power and lower wages; income grows fastest for the highest earners, while the low-income earners suffer from high inflation (ONS UK figures, middle of May 2022, showed that the pay for the top 1% of employees, between December 2019 and March 2022, increased by 7%, while the 10th lowest paid was just 2%). This is a reversal of the income inequality that decreased during the pandemic, not only in the UK but also in the USA and the EMU, in view of more generous government benefits, and financial support to furloughed workers. The UK ONS showed, on 07 January 2022 (The Economist, 08 January 2022), that the richest 10% of households owned 43% of total wealth; the bottom half held only 9% (average over April 2018 and March 2020). Low interest rates and QE increased the prices of bonds, shares and property. The Bank of International Settlements (BIS) in its 2021-report (The Economist, 10 July 2021) suggested that monetary policy could not account for inequality. However, economic policies would be necessary, including financial regulation to avoid speculative excesses (shadow banks should be regulated to prevent the kind of speculation that caused the GFC), and also active fiscal policy. Inequality policies should include welfare benefits, minimum wage laws and medical support. In the UK and USA, minimum wages were increased; in the EMU, a directive to increase minimum wages was proposed to member states (agreed by the European Council and Parliament on 07 June 2022). Such measures were less evident in the USA (Goodhart & Pradhan, 2020, chapter 7). Coordination of monetary, financial stability and fiscal policies should be properly employed, which could reduce inequality. The BoE revised its inflation forecast for 2022 to 3%, above its inflation target. However, it was not clear why the BoE was not to pursue counter-inflationary action, in view of further inflation increases—the CPI rose to 5.5% in January 2022. What was needed was investment, which would not be helped with deflationary monetary policies. Coordination of policies with the government should help. This was also relevant in view of UK’s export services reduced by £110bn over the four years after the Brexit election (2016 to 2019), with financial services hit the hardest. Trade with the EMU fell by a fifth after the Brexit (Financial Times, 01 June 2021). Overall investment over the same period fell by

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4.8% (Financial Times, 01 June 2021). In the first quarter of 2022, the current account deficit was 8.5% of GDP, the worst figure on record, causing the pound to depreciate. In view of all this inflation would rise in the UK, more than in the USA and EMU. The EMU’s recovery was associated with inflation. Consumer price inflation increased by 1.9% in May 2021, within the ECB’s inflation target of lower but close to 2%. The EMU inflation rose to 2% in May 2021, the first time to be above the ECB’s inflation target. That increase emerged from the 1.6% inflation in April 2021; by January 2022 it increased to 5.1%, to 7.5% by March 2022 and to 8.1% in May 2022— that inflation increase was due to high prices of imported energy and food. The EMU’s €750bn stimulus, Next Generation Programme, which suspended the fiscal rules, to fund investment and reforms to enhance growth, was in grants in the form of cash transfers from rich to poorer countries. The EMU’s recovery was significant historically but not as large as the USA’s. Inflation was not as high as the USA’s. The EMU economy was expected to reach pre-pandemic levels in the first quarter of 2022. While the economy was recovering, fiscal and monetary policies were needed as the ECB President stated on a number of occasions. Permanent abandonment of the Stability and Growth Pact is urgent. Proper coordination of fiscal and monetary policies would thereby be possible. The Economist (25 May 2021) reported that global capital spending in early 2021 surged. In the USA business investment was rising at 15% on an annual rate, due to fiscal policy, which enhanced expectations that demand would increase. Also to monetary policy because the Fed, in September 2020, changed its policy to an average inflation than a fixed inflation target. After its September 2020 meeting, the FOMC noted, in a statement, that it expected to maintain its current target range for the federal funds rate. The statement noted that “[u]ntil labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time”. That was a departure from the previous FOMC meeting in July 2020, when it stated, “The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to

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achieve its maximum employment and price stability goals” (both statements are reported in Wolman, 2021, p. 1). Clearly, the Fed’s change of monetary policy means that if inflation is running above or below the target, the focus is for inflation to average 2%. This includes targeting inflation that is above 2% for some time following periods during which inflation is below 2%. The FOMC, and at its meeting in September 2020, decided that the best way to accomplish its inflation target was to keep the federal funds rate at its effective lower bound until both its inflation target and its maximum employment goals are reached. The US investment, as a share of GDP, prior to the GFC and after 1980s, became sluggish. Following the GFC, it took two years for investment to reach its previous peak. At the start of the Covid-19 pandemic, although investment decreased more sharply than after the GFC, it bounced back quicker. Despite firms were willing to pay workers, many firms were having trouble filling vacancies. Goodhart and Pradhan (2020, p. 111) reported relevant factors that would contribute to rising inequalities. These included technological changes, whereby technology eliminates the demand for semi-skilled workers; also, concentration and monopoly power, globalisation and demography.5 Workforces did not have improvement in their living standards, unlike their bosses. All these factors weakened the bargaining power of trade unions, despite the strengthening of the labour market. However, in the USA there were more jobs than unemployed workers. Still, though, wage growth rose, possibly because workers negotiated hard in view of rising prices. In the UK, the ONS reported that the volume of goods and services in the second quarter of 2021 rose by 2.3%, higher than the 1.5% decline in the first quarter, due to increase in consumer expenditure and to the easing of Covid-19 restrictions. According to the official British forecaster, the Office for Budget Responsibility (OBR), the UK economy was 2.2% below what it was in its pre-Covid-19 level, but it should reach the same as in the pre-Covid-19 by the end of 2021 (The Economist, 14 August 2021). Manufacturing growth in the UK grew significantly in 2021, due to strong growth in production companies (Financial Times,  In terms of demography, its future reversal would produce a new age of declining real output growth, higher inflation and inequality (Goodhart & Pradhan, 2020). 5

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14 June 2021). This should help the supply-side of the economy, in view of its infrastructure, and inflation to be contained. In the EMU, supply shortages, rising energy costs and ongoing geopolitical tensions threatened its recovery—growth slowed to 0.2% in the first quarter of 2022. In the USA consumer prices increased in May 2021 by 3.4%, due to strong demand for goods and services and constrained supply. The recovery in the UK slowed in May 2021. This was due to slow recovery in retail, construction and manufacturing. Slower recovery from April 2021 emerged, when the economy began to reopen, due to rising infections of the Covid-19 pandemic (mainly the Delta), despite the successful vaccination. The case of the USA was similar. Labour shortages are another reason of the slower recovery, which produced further slower UK recovery, in the third quarter of 2021. The US economic growth in the same quarter was 2%, and in the EMU 2.2%. However, growth slowed down in the first quarter of 2022 in view of the war in Ukraine (the impact of the Ukraine war is more pronounced in the EMU, due to its relying heavily on Russian oil and gas), supply constraints, high Covid-19 infections and energy prices.

Current Relevant Developments The US President abandoned his proposed increase of the domestic corporate tax rate, from 21% to 28%, in mid-2021. This decision is separate from his proposal on the international corporate tax.6 In terms of the latter proposal the G7 group of finance ministers meeting in London, on 04/05 June 2021, reached an agreement for a minimum tax rate of 15% for the large multinationals in countries they operate. The President’s initial proposal was for a minimum rate of 21% but was reduced eventually to 15% so that a wider group of countries would accept it.7 The focus of this tax is on multinationals to pay tax both where their headquarters  There is the question of the impact of the imposition of corporate taxes on economic growth. Gechert and Heimberger (2021) provide empirical evidence, which shows that corporate tax changes do not have significant impact on growth. Aslam and Coelho (2021) conclude that countries that impose a minimum corporate tax produce higher corporate tax revenues as a share of GDP. 7  For the international corporate tax, as proposed by the US President, there is empirical evidence that countries that impose minimum taxes report higher revenues as a share of GDP (IMF, 2021a). 6

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are and where they undertake business. In effect, with a minimum global tax rate, companies that avoid taxes abroad would have to pay them where they have their headquarters; countries can apply it to all companies. In October 2021, all the OECD countries endorsed the G7 agreement. However, the Secretary-General of the OECD suggested (according to the Economist, 28 May 2022) that the implementation of the global corporate tax will occur in 2024, due to resistance by the US Senate and some EU countries. Following negotiations in Paris (01 July 2021), 130 OECD countries (and G20 countries) signed the agreement (nine refused to sign) on the global minimum corporate tax rate, to be implemented in 2023.8 Disagreements among countries, including the UK and the EMU, emerged, requiring exclusion of their financial services groups. In the UK, the financial services are to be exempted from global tax rules, a proposal that was accepted by the OECD negotiators (Financial Times, 20 July 2021). Financial services in the UK, and after Brexit, suffered a great deal in view of a number of financial traders moved from the City of London to Brussels, Paris, Frankfurt and New York. The EMU is trying to overcome disagreements on the OECD agreement with some countries, which argue that the global corporate tax proposal might break EMU laws and damage economic growth (Poland, Hungary and Estonia initially disagreed with the relevant tax proposal, but eventually supported the OECD agreement). One hundred and thirty-six, the G20 and EMU, countries, at their meeting in Paris (08 October 2021), signed the agreement (of the 140 negotiating countries, Kenya, Nigeria, Pakistan and Sri Lanka refused to sign). The G20 member countries, and at their meeting in Venice (10 July 2021), urged the countries that had not signed their agreement to sign it by the October 2021 meeting of the G20 member countries in Rome; it was signed. The IMF Managing Director at the G20 meeting argued that the relevant signing was “a historic agreement” and that “[t]his will help  The EU published a directive for the 27 member states, expected to introduce relevant regulation for the corporate tax rate—Cyprus and Ireland announced increase in their corporate tax rates from 12.5% to 15%; the rest are expected to introduce relevant regulations. The world-countries are expected to introduce relevant regulations but progress is lacking. A US draft legislation on the reforms is included in the President’s $1.75tn infrastructure bill. 8

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countries preserve their corporate tax base and mobilize revenue by ensuring that highly profitable companies pay their fair share everywhere” (Georgieva, 2021). The European Commission delayed its digital levy tax so that it would be able to encourage the prospect of the global corporate tax. The European Commission’s digital levy tax is a measure to raise funds to help it accumulate sufficient amount to pay off its recovery fund (Financial Times, 14 July 2021). The UK Chancellor wishes to exempt the UK banks from the G7 tax plan. His argument is that such tax might persuade banks to reallocate themselves to other exchequers, thereby worsening the City of London’s Brexit problems. The global corporate tax rate would only be effective if enough countries adopted it, for otherwise affected companies would be relocating to countries that have not adopted it. The US President’s proposal for a global corporate tax rate implies that the multinational companies pay a fair share of taxes. This is supportive of the US President’s plan to raise the top rate of income tax for those earning more than $400,000, from 37% to 39.6%; also to increase capital gains tax, used by wealthy to avoid income tax. The Wealth Tax Commission suggests a similar proposal for the UK. The ‘Cornwall Consensus’ suggests the G7 global corporate tax should be followed by a new face of collaboration between countries. Due to the world moving towards inflation, the Fed decided for short-­ term overshoot of its 2% inflation target. The ECB set a new 2% inflation target, in that it would tolerate temporary moves away from the 2% target. The ECB announced its new strategy and published it on 08 July 2021; however, it did not go as far as the US Fed’s relevant change of a flexible average inflation target. ECB’s change implies that when inflation exceeds its target or it is below 2%, it would be ‘equally undesirable’, and it would intervene as necessary. The ECB would have now a symmetric inflation target. Therefore, an explicitly symmetric 2% inflation target has replaced the ‘close to but below’ 2% target of the ECB. Its President is clear that what the ECB proposes is not similar to the Fed’s average inflation targeting (Financial Times, 9 July 2021), thereby allowing prices to rise faster to compensate for previous shortfalls. The ECB now accepts ‘temporary deviation’ around its new inflation target of 2% as part of its new monetary policy strategy. The ECB’s new monetary policy target

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emphasises the symmetry of its target, but proposing an asymmetry on how to achieve it. Avoiding inflation expectations below 2% when policy interest rates are low, the ECB proposes to use other measures even when this implies that inflation will run above 2% for a while. The Fed targets average inflation and worry more when undershooting its target. The BoE is also now more tolerant of inflation emerging above its inflation target. The annual US consumer prices increased in May 2021 by 5.0%, which produced a debate whether the USA was at a stage of overheating because of increasing demand and supply constraints. The Fed officials suggested the relevant inflation surge was transitory; it kept its QE policy and its interest rates low to provide stronger and more lasting future recovery. The ECB increased its bond purchases, in view of worries about the EMU economy, but it did not increase its interest rates (Financial Times, 04 December 2021). The BoE intended to slow its QE programme. This is not tapering. It relates to the amount of its bond buying and planning it to last until the end of 2021, which requires a smaller amount of bond buying. The US 10-year Treasury bond price increased with the yields falling to a low rate at 1.25% (July 2021), a sign that suggested investors believed that the Fed was right about the rising inflation that it would not last. Under such circumstances, risk-free government bonds become more attractive. On 26 July 2021, the real yield on the 10-year US Treasuries fell below zero (-1.127%) in view of growing uncertainty over the economic growth, which adds to increased Treasury bonds demand (Financial Times, 27 July 2021). In August 2021 the 10-year US Treasury yields increased but were still low (1.13%). This was due to the Fed’s statements about future tightening of monetary policy, which influenced inflation expectations and thereby Treasury yields. However, in March 2022, Treasury yields increased significantly in the three countries, especially in the USA where the 10-year bond yield rose as high as 3.2% in the middle of May 2022, in view of higher inflation due to expectations of the Fed raising the rate of interest, even if this would risk a recession; on 26 May the 10-year yields fell to 2.71% due to economic growth foldering. The 2-year bond yields also increased and rose above the 10-year bond yields,

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in the USA and elsewhere, in view of expected recession, causing ‘inversion’ of the yield curve. The ECB’s Pandemic Emergency Purchase Programme (PEPP),9 part of the ECB’s Asset Purchase Programme (both part of the QE), is under pressure to be reduced because of the EMU’s economy rebound. The ECB President suggested (Financial Times, 19 June 2021) that it was premature to do so since PEPP was a main crisis tool. The ECB increased its GDP forecast by 0.6% to 4.6%, along with the expectation of full recovery from the pandemic by the autumn of 2021. The EMU Recovery and Resilience Funds (RRF) is the next Generation EMU programme for fiscal help, available at €672.5bn in grants and loans, which is funded by EMU debt issuance. These funds would be allocated to member states, which submit recovery plans to the European Commission, which should include 37% resources to climate change and 20% to social inclusion, education and healthcare. The rest would include structural reforms according to the European Commission’s country-specific recommendations. The UK government’s proposal for social care, from April 2022, is associated with a 1.25% rise in national insurance contributions. This is for employees, employers and self- employed. This proposal has been criticised in that it “will put jobs at risk … and prevent new jobs from being created” (Financial Times, 09 September 2021). This is due to employers required to pay national insurance contributions, which affect investment and employment negatively. A new development emerged due to the spreading of the Delta variant in the USA, UK and EMU. This dented the recovery that had emerged in these countries. The ECB President reinforced this statement when she suggested that the Delta variant was ‘a growing source of uncertainty’ and proposed that the ECB should be more tolerant before pursuing contractionary monetary policies (Financial Times, 24 July 2021). Close coordination of relevant policies between the governments and Central Banks is of paramount importance. More recently, though (November 2021), despite the Delta wave in the EMU, the economy was improving.  The ECB’s PEPP programme was introduced in March 2020; it comprises of €750 billion and aims to help the EMU due to the Covid-19 syndrome. The PEPP comprises of temporary asset purchases of private and public sector securities. Thereby enabling people and firms to get access to needed affordable funds to manage the crisis. 9

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Unemployment in November 2021 fell to pre-pandemic level. This was due to monetary policy loosening, fiscal policy pan-EU recovery fund and suspending the Stability and Growth Pact. Throughout the EMU, though, there were country differences, which needed proper coordination of monetary and fiscal policies to achieve success. The ECB President’s view, and the Fed’s, on the Omicron variant is that it is too early to say what impact it would have on the EMU’s economic recovery and inflation. Michael Saunders, a member of the BoE MPC, expressed similar views in relation to the Omicron impact. An interesting question is the extent to which higher productivity would emerge after the Covid-19 pandemic, which helps to increase GDP—productivity has slowed during Covid-19 and for many years before. Christinasen et al. (2021) suggest that productivity could increase through “digitalisation and reallocation of workers and capital (e.g. machines and digital technologies) between firms and industries” (p. 1). Haskel (2021) suggests, “the successive lockdowns have accelerated the digitalisation of exchange between customers and businesses (e-­commerce, interactive digital fitness), and between businesses (cloud-based transactions and service provision). Moreover, home-working has increased the online technologies (video and communications technologies; cloud-­ based identity verification technologies)” (p.  14). Digitalisation and automation, including e-commerce and remote work, have accelerated over the pandemic period. However, boost in tangible capital (building and machinery) increased productivity less. A recent development is cryptocurrencies in world markets. According to the Economist (21 May 2022), cryptocurrencies were worth $3tn (November 2021), but fell to $2tn (mid-April 2022); by mid-June they fell below $900bn (Financial Times, 25 June 2022). This implies a potential bubble that could produce systemic risks. Cryptocurrencies are a growing interest in view of record low bond yields. They are very high risky assets, and capital rules to regulate them are necessary. Cryptocurrencies have become a serious challenge to currencies, threatening to unsettle monetary policies. The cryptocurrency market has expanded substantially, and recently exceeds the amount of transactions in the currency markets. Cryptocurrencies would danger their survival unless they adhere to regulatory frameworks. Central Banks have

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intensified their criticism of cryptocurrencies in that they are very much against the interests of the public; they are speculative assets and could produce financial instability. There is also the danger of bubbles and lack of transparency.10 The UK’s BoE suggested in its Financial Stability Report (December 2021) that cryptocurrencies are risky and would create serious financial instability. The cryptocurrency prices crashed (second week of May 2022), containing the danger of spreading into the financial system. The market for cryptocurrencies is now larger ($2tr) than that of the subprime mortgages ($1.3tr), which caused the GFC. The UK Treasury suggests that the Financial Conduct Authority should be given a role in terms of controlling the cryptocurrency market. The BIS report (23 June 2021) is against cryptocurrencies. The report suggests that cryptocurrencies are against the public interests and the payment system and called for tougher capital requirements in holding them. This suggestion is relevant and crucial (Financial Times, 24 and 27 June 2021; Bank of England XE "Bank of England" , 2021) and supports the creation of Central Bank Digital Currency (CBDC). Multilateral cooperation and coordination, as well as global oversight of cryptocurrencies, are crucial. The Financial Policy Committee (FPC) of the BoE warned the financial institutions that they should be very cautious while adopting cryptocurrencies. The US Treasury Secretary has suggested that cryptocurrencies should be properly regulated. This is very important since cryptocurrencies threaten macroeconomic stability including financial stability. The Fed Chair has suggested that there is no need to rush to create CBDCs, and that CBDCs would not need any cryptocurrencies. The UK financial authorities are prepared to regulate the cryptocurrency market. Bordo (2021) suggests, “CBDC could make monetary policy more efficient. … Moreover, varying the interest rate on CBDC can provide true macro and price stability” (p. 2). In addition, “CBDC could have a great impact on the global economy by facilitating international payments” (p. 2); “CBDC could greatly improve cross-border payments  El Salvador is the first country to adopt bitcoin as an official currency, alongside the US dollar (since 2001), on 07 September 2021. On its first day, the global price of bitcoin reduced by more than 10%; since then the loss has been about a third of its value (Financial Times Magazine, 28 May 2022). El Salvador’s cryptocurrency has not persuaded investors. In September 2021, China was the first country to prohibit cryptocurrencies. 10

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which at present are costly and slow” (p.  17). Relevant research and implementation of CBDC is undertaken around the world. CBDCs would be issued as digital version of notes and coins, regulated by Central Banks. They would be Central Bank’s money, available to the public in digital form, directly convertible to cash and deposits. In the UK the creation and launch of the CBDC “will be a new form of digital money, issued by the BoE, for households and business to use” (Mutton, 2021), and support monetary policies. A ‘Taskforce, Engagement Forum’ and ‘Technology Forums’ have been set up by the BoE and the Treasury to coordinate investigation and exploration of a future CBDC and to initiate a consultation process in 2022 to assess the case of a CBDC. The ECB’s introduction of a ‘digital euro’, proposed in July 2021, is to be one of two-thirds of the world’s Central Banks, which are running experiments as to whether to launch digital currencies, as suggested by the BIS (as in Financial Times, 21 and 24 June 2021). The Fed is a latecomer to CBDCs. Given the dollar’s almighty nature, strong participation of the Fed in CBDCs is absolutely vital. The BIS in its annual report (July 2021; reported in the Financial Times, 08 July 2021) suggested that most Central Banks would soon introduce currency in digital form, which is supported in view of the cryptocurrencies being speculative assets, and they can be used for money laundering and cannot be legal.11 Commercial Banks, however, worry that digital currencies would decrease substantially their deposits, and more so in the case of a financial crisis. Limiting the amount of virtual cash that customers can hold is a way to avoid this risk.

3 Coordination of Economic Policies Macroeconomic policies have been in ascendancy, since the GFC, but more so during the Covid-19. Fiscal policies were pursued mainly during the Covid-19. As a percentage of GDP, fiscal spending was 13.3% in the USA, 11.7% in the UK and 7.9% in the EMU (IMF, 2021b). There is  Two countries, Bahamas and Nigeria, have officially introduced CBDCs. China and more other 100 countries are exploring the introduction of CBDCs. 11

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uncertainty about the strength and durability of the upturn beyond 2021, due to recurring high inflationary pressures and tightening of financial conditions. Economic policies of governments and Central Banks should be properly coordinated to achieve relevant objectives. Central Bankers, who thought that inflation was transitory, are now having second thoughts; prices have continued to rise, raising the possibility of reducing their support for recovery. Coordination of policies is thereby paramount. An interesting question is whether the high public debts would change the Central Bank’s monetary policy. This is a relevant question in the case of the QE of the Central Banks. Central Banks buy government bonds by creating new money, and the amount of government debt accumulated in this way by Central Banks amounts to more than a third of the government’s debt. This implies that the Central Banks’ monetary policy might change to debt management. Coordination of monetary and fiscal policy is the best way to avoid it. Another relevant example of coordination is the policies regarding the current Central Banks’ independence and the policies of the Treasuries. As long as inflation and interest rates decrease, the Treasuries are happy. However, when the Central Banks increase their interest rates, this would not be in agreement with the Treasuries in view of high government debt; serious problems would emerge, and the independence of Central Banks would be under threat, and possibly abandoned. A period of policy uncertainty would emerge. Proper coordination of fiscal and monetary policies, along with financial stability, is necessary to avoid such conflict. A relevant question is the appropriate economic policies after the Covid-19 to support recovery and growth. It follows from our analysis that stronger potential supply with strong investment and productivity growth, as well as technological innovations, and supported by coordination of fiscal, monetary and financial stability policies are relevant, which would make sufficient recovery. Our contribution clearly demonstrates the need for supply policies. Supply-side policies comprise of government support to deliver innovation and productivity, along with infrastructure. In the EMU a program, which is thought proper for boosting industrial and technological development, is in place; this should enhance the supply-­ side and productivity, as required. Such technology-driven

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productivity should help inflation control, not only in the EMU and in the UK but also in the USA where the focus is on the President’s stimulus. Supply constraints and inflation could produce the renewed threat of stagflation; this is so due to economies slowing down while aggregate demand is high in relation to the supply constraints. The BoE Governor at a speech (28 March 2022) warned that soaring energy prices will hit growth and inflation, thereby stagflation would emerge. This poses a serious challenge to the MPC. Policy-makers should be alert to this possibility, and coordination of policies is relevant and should help greatly. Such coordination would reassure markets that Central Banks and governments work together in a convincing way to stabilise their economies. Policies to produce financial stability are also relevant. Saporta (2021) discusses measures introduced and utilised in the UK after the GFC by the FPC and the Prudential Regulation Authority (PRA). Saporta (op. cit.) suggests that such measures were relevant “to free up existing bank resources to enable banks to continue lending, by releasing the countercyclical buffer, freezing systemic buffer rates and by implementing an extension of the transition for new accounting provisions for expected loss to flow through to the capital framework” (p. 3). The BoE published its stress-testing scenario, in January 2021. This test assesses whether the capital buffers are sufficient to avoid problems of the major banks and building societies. The EMU and the USA also introduced similar prudential measures. The ECB plans to impose leverage restrictions in view of banks taking excessive risks. The ECB would intervene by imposing capital requirements if leverages increased at worrying levels. The results of stress tests should help greatly to decide on relevant policies (Financial Times, 03 July 2021). Clearly, macroprudential policies can support financial stability and can thereby have positive supportive effects on monetary policy. They can control the leverage of financial intermediaries during upturns. They can also support aggregate demand during downturns, in that they can contain systemic risks in financial markets. Fiscal policy is important in stabilising demand at non-inflationary full-employment levels. It could also produce a less unequal distribution of disposable income and can improve productivity growth and thus potential growth. Coordination of fiscal, monetary and financial stability policies, including incomes policies, should aim to achieve full

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employment, price stability and financial stability along with fair income distribution. Nominal wages should rise in relation to the sum of average growth of productivity and inflation so that labour costs rise at the acceptable rate of inflation. A case for incomes policy thereby becomes very relevant. Coordination is very relevant in the case of current monetary policies. The Treasuries should be prepared to accept any plans for changing their fiscal policies so that Central Banks would have sufficient room to reduce their QEs without having to increase their interest rates. Not only is this relevant now, but also in the future and under similar circumstances when coordination of fiscal and monetary policies with financial stability and incomes policies are necessary. Central Banks should continue with their role of ‘lender of last resort’, especially during liquidity crises, as in the case of the GFC. They should also continue to stabilise financial markets using tools other than the short-term interest rate, such as reserve requirements for different types of assets, and even consider credit controls in order to channel credit into areas that need it and to avoid credit-financed bubbles of the type of the pre-GFC era. Most importantly, Central Banks should make sure that public debt allows governments to fulfil their role as stabilisers (see, also, Arestis, 2013; Hein & Martschin, 2021; Eichengreen et al., 202112). The President of the ECB has argued on a number of occasions that coordination of policies is important. Fiscal policy helps monetary policy by enhancing demand, with monetary policy helping fiscal policy to be more effective. The House of Lords (2021) report suggests, “the Chancellor updated the Bank of England’s mandate to confirm that the MPC is required to support the Government’s economic policy to achieve balanced, sustainable growth consistent with a transition to net zero carbon emissions. The MPC is required to support the Government’s economic policy as a  Eichengreen et al. (2021) trace the evolution of public debt from the wars of medieval Europe through to the Covid-19 syndrome to conclude that growing the economy is the only way to reduce public debt. A relevant example is the public borrowing in the UK, which was £13bn lower than official forecasts of 2021, according to data published by the ONS (on 25 June 2021). This was due to higher tax receipts in view of the 2021 recovery. In January 2022, the UK government reached a surplus of £2.9bn, in view of stronger economic recovery. This could have been higher but due to high interest payments and increased government costs the surplus was £2.9bn. Still, this enables the UK Chancellor to provide necessary support to the economy. 12

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secondary objective. Its primary objective is to control inflation” (p. 6). The report concludes “that any changes to the Bank’s mandate must be considered carefully” (p. 25). However, and in view of our analysis, it is much better for both the Treasury and the BoE to coordinate their decisions in terms of their economic policies to avoid problems. Over the Covid-19 the fiscal and monetary policies operated independently but consistently, which supports our suggestion. The question as to when and how to tighten monetary policy relates to the coordination of monetary and fiscal policies. Tightening should be undertaken initially via the QE, followed by increases in the low interest rate, along with fiscal policy. This is important in view of the collaboration between the Treasuries and the Central Banks in terms of the QE, especially so in the UK (House of Lords, 2021) and the USA (Chadha et al., 2021); in the EMU it is more uncertain due to insufficient institutional arrangements; the EMU needs a supranational fiscal authority, which is unlikely to emerge. Our analysis demonstrates that a comprehensive set of policies is necessary to promote a strong and sustainable long-term recovery. Coordination of economic policies is also required. The economies have large government and private debt in view of the unconventional policies in place, and there is the need to raise interest rates due to inflation. Raising interest rates may produce conflict between Central Banks and governments, in view of increasing the government’s interest burden. Uncertainty has increased, due to supply-demand mismatches, inflation pressures and increased risk-taking in financial markets. Financial uncertainties are in evidence, and financial instability may occur, which should be avoided. The Omicron variant created further uncertainties, which threatened to prolong the pandemic, and produced further increases to supply constraints. In addition, global energy prices threaten to cause inflation to remain high. Fiscal and monetary policies are urgently needed, which should be coordinated to avoid these problems. The high inflation rates are the main reason why the committees of the Central Banks of the Fed, ECB and BoE proposed restrictive monetary policies at their December 2021 meetings. The Fed’s FOMC at its meeting (15 December 2021) decided to leave its main interest rate unchanged but will reduce its QE further in 2022 to enable it to increase its rates of interest. The FOMC did increase its federal funds rate from 0.25% to

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0.50% at its meeting on 16 March 2022 (the first of further increases over 2022). The minutes of the FOMC’s 16 March 2022 meeting showed that a plan was agreed to reduce its $9tn QE by $95bn a month, and end it by the third quarter of 2022. The BoE’s MPC at its meeting (16 December 2021) decided to increase its Bank Rate to 0.25% (from 0.1%) not only in view of high inflation but also of the unclear impact of Omicron and kept its QE unchanged, but will completely reduce it by 2023. The MPC at its meeting on 02 February 2022 increased its interest rate to 0.5% and to 0.75% at its meeting on 17 March 2022 (under the expectation of inflation increasing to 8% by the end of June 2022). The ECB’s Governing Council at its meeting on 16 December 2021 left its policies unchanged, but it would slow its QE pandemic support package in 2022; it has actually adopted scaling back its bond buying plan in March 2022. The ECB at its 15 April 2022 meeting, and due to strong rise in energy prices, decided to halt its QE in the third quarter of 2022, with gradual increase in its interest rate to follow, and end its negative interest rate policy.13 Clearly the three Central Banks move from QE to QT (Quantitative Tightening) and have put fighting inflation at the top of their monetary policy priorities.14 The ECB’s governing council at its 09 June 2022 meeting decided to increase its key interest rate by 25 basis  In fact, the ECB’s President has repeatedly suggested a ‘gradual and data dependent’ approach is necessary to contain increasing inflation. Raising interest rates would not reduce energy prices due to the war in Ukraine. The Chair of the Fed made similar comments but the FOMC increased the Fed interest rate. The BoE Governor, at his meeting with the House of Commons Treasury committee (16 May 2022), suggested that the UK inflation was due to global shocks, to the Russian invasion of Ukraine and to the Chinese zero-Covid policy. The BoE would raise interest rates to ensure inflation reaches its target. However, the Governor suggested, he would be unable to avoid inflation reaching 10% in 2022, due to rising food prices. The Governor at his conference speech in Vienna (23 May 2022) defended the BoE’s policies and argued that the high inflation was additionally due to the unexpected shrinking of the labour market. 14  According to the Economist (25 June 2022) current CPI inflation rates are as follows: the UK increased to 9.1% (May 2022), due to international energy and commodity prices increase. The US inflation increased to 8.6% (May 2022), due to the surge of energy and commodity prices. The EMU inflation increased to 8.1% (May 2022), due to a number of the usual factors, but mainly to the end of Russian gas supplies. Average wage growth in the three countries has also increased, but it does not keep pace with inflation; real wages thereby falling (due mainly to the decline of union power). The IMF predicts that the UK, USA and EMU to have slow GDP, expected in the UK to increase by only 1.2% in 2023, while a higher increase in the USA and EMU is predicted. Surge in energy bills is expected to increase inflation (reported in the April 2022 IMF World Economic Outlook). According to the UN, the Ukraine invasion could produce a global food crisis. 13

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points at its July 2022 meeting. If inflation persisted, further increases would be undertaken at its September 2022 and later meetings. Transitory period of inflation is no longer suggested. Tighter monetary policy is employed despite the Russia’s invasion of Ukraine, which influences negatively growth and produces further inflation. Stagflation is imminent; coordination of policies is the best way forward. Such coordination should focus on enhancing strategic investment to improve the supply chains, instead of only tightening monetary policy.

4 Summary and Conclusions Due to Central Banks not always achieving their inflation targets (Angeriz & Arestis, 2008; Arestis, 2021), monetary policy needs coordination with fiscal and financial stability policies. There is empirical evidence that under fiscal and monetary policy coordination, fiscal multipliers are higher than when no policy coordination prevails, and even higher than the multipliers of the Keynesian literature (Eggertsson, 2006; Arestis, 2012). Such coordination would reinforce the achievement of the objectives of the policy-makers and limit potential policy conflicts. Creation of fiscal councils to be independent bodies from the politicians is of paramount importance. Such independent fiscal councils should be delegated the responsibility for the fiscal process. An example of such fiscal council is the UK’s independent OBR, which could undertake the relevant role. While fiscal policy is efficient in both expansionary and contractionary periods, monetary policy has asymmetric effects; it is efficient during the expansionary periods, when it contains the dangerous boom of the economy, but not so effective over the contractionary periods in stimulating the economy. The GFC and the Covid-19 periods confirm this proposition. This suggests that coordination of fiscal and monetary policies was required to produce positive effects in both periods. Currently in view of uncertainties that economies face, and the combination of soaring energy prices, the Covid-19 syndrome, strong demand and supply constraints, would enhance inflation in 2022. Under such uncertain circumstances coordination of the relevant policies is thereby paramount in the three countries examined.

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A final comment relates to the excessive total debt of the GFC period, increased over the period of the Covid-19 pandemic, and well above the usual debt rules, in the USA,15 UK and EMU (Goodhart & Pradhan, 2020). The public sector debt, financial sector debt, non-financial corporate debt and the household sector debt increased substantially; the household debt ratio increased least (Goodhart & Pradhan, 2020, p. 167). The debt-service ratio, namely the ratio of payments of interest and repayment principal to income, has remained constant because the rise in debt has been accompanied by low interest rates (Goodhart and Pradhan, op. cit.). The rise in the public sector debt has been contained by the low interest rates, causing the debt-service ratios to be nearly constant (the debt-service ratio of the corporate sector is low). When nominal interest rates increase, in view of inflation and financial stability concerns, public sector finance would suffer substantially, producing the ‘debt trap’. The best way to avoid it is growth. Faster real growth, and higher than the level of real interest rates, produces falling debt ratios (Arestis, 2021; Goodhart & Pradhan, 2020, pp. 174–175). An example is the recent UK’s recovery, which has helped the public finances to improve through boosting tax revenues. The excess debt over the Covid-19 post lock-down growth caused the ratio of global debt to GDP to fall from 362% in March 2021 to 353% in June 2021 (Institute of International Finance). If GDP growth continuous, further decrease of the ratio should emerge. Productivity increase would help greatly; unfortunately, productivity in the examined countries is weak.16 Productivity in the USA, for example, declined by 5.2% in the third quarter of 2021, mainly due to constrained supply (The Economist, 11 December 2021); similarly in the EMU. Productivity in the UK since 2007 was a dismal 0.4%. Increase in investment is an important way to increase productivity. Over the same period as above, investment grew by less than 1%,

 On 07 October 2021, the US Senate voted to suspend the federal debt limit until December 2021. The House of Representatives approved the federal debt limit on 13 October 2021. The Congress, on 15 December 2021, increased the debt limit to $2.5tr. 16  Staff working at home for longer hours, in view of the coronavirus symptom, produced lower output, thereby productivity has weakened, and this is so despite accelerating technological changes. 15

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compared to 14% increase in some countries in Europe and USA (The Economist, 20 November 2021). Government spending in areas that help productivity and GDP, like skills, infrastructure and research, is relevant. In terms of unemployment, the situation is more favourable in the USA, in view of fewer unemployed teenagers, but not so in the UK and EMU.17 In the USA, “inward migration in recent years” has helped (Goodhart & Pradhan, 2020, p. 175). Not so in the UK, in view of Brexit, where 1.4m European Union workers left the UK and returned home (Financial Times, 20 October 2021). The OBR’s suggestion is that the UK is 4% worse off than without inward migration.18 In the EMU a decline in the number of workers emerged. Another problem is the real rate of interest. If it increased, it would be very difficult to get away from the ‘debt trap’ (Goodhart & Pradhan, 2020, p. 175). The corporate sector’s debt increase is of concern since it is a drag on hiring and investment. Russia’s attack on Ukraine has produced sharp increases in global energy and other prices; supply shortages and stronger inflationary pressures emerged. Although economic recovery was supposed to be completed from Covid-19, Russia’s invasion of Ukraine, and Chinese lockdowns, are causing problems to the recovery and inflation pressures; sharp deterioration is expected in terms of increased supply chains and a ‘wage-price’ spiral. Thereby, a ‘new inflationary era’ emerges (as the General Manager of the BIS suggested; reported in the Financial Times, 06 April 2022). The EU is bound to suffer more than the USA and the UK, due to its greater dependence on Russian energy. The ECB, at its 10 March 2022 meeting, scaled back its bond buying stimulus plan in view of the expected higher inflation. The post-Covid-19 economic recovery is thereby threatened. Our suggestion  More recent unemployment rates (The Economist, 11 June 2022) are as follows: unemployment in the USA 3.6% (May 2022), in the UK 3.7% (February 2022) and in the EMU 6.8% (April 2022). Over the same period (and according to the ONS) labour market statistics (18 May 2022) in the UK, the number of vacancies increased, implying more vacancies than unemployed people, for the first time on record. Bonuses (finance and business services) are strong, but regular pay does not keep up with inflation, consequently real pay decreases. 18  According to Observer’s poll (26 December 2021), more than six out of ten people voted that Brexit is very bad for the UK. Forty-two per cent who voted for Brexit in 2016 are now of serious negative views about Brexit. This is not unexpected in view of Brexit’s negative impact on trade, which has increased the supply constraints, thereby affecting negatively the UK’s economy. 17

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of proper coordination of the relevant policies to enhance economic activity would be a great way forward to reduce the ‘debt trap’.19 The Fed’s FOMC and the BoE’s MPC at their meetings, 04 May 2022, due to higher inflation rates, increased their interest rates (FOMC to a range of 0.75%–1%; MPC to 1%) and announced plans to reduce their QEs. At their 15 June 2022 meetings, they increased their interest rates: FOMC to 1.50%–1.75% and the MPC to 1.25%. The ECB’s governing council emergency meeting (15 June 2022) did not increase the relevant interest rate, but announced that its QE would be reduced on 01 July 2022 and would increase its interest rates in July. However, a new tool was introduced to reduce borrowing costs for the weaker economies, such as Italy and Spain, in relation to stronger economies, such as Germany, thereby imposing a cap on sovereign spreads for fiscal sustainability. No details were provided as to when it would be launched and how it would work. For this to work properly, EMU needs to be a federal entity, which would allow fiscal and monetary policies coordination to implement it properly. The ECB had weaker growth in the first quarter of 2022 and higher inflation in April 2022; similarly in the case of the USA. The BoE forecasts a contraction in 2022, with inflation increasing above 11% by the end of 2022 (also due to weakness of the sterling). The ECB is expected to raise its interest rate and reduce its QE. The increase in interest rates, due to higher inflation, raises the issue of how it would work in view of the inflationary pressures are due to rising energy costs, supply disruptions, the Ukraine war, China’s lockdowns and Brexit (in the case of the UK). These inflationary pressures influence the supply chains heavily, thereby raising interest rates would not work as expected; such approaches risk creating recession. Coordination of monetary and fiscal policies is vital. Our suggestion also allows for ‘policy flexibility’, which relies on economic circumstances. It would also produce future durable recovery.

 The UK’s public borrowing fell by more than expected in September 2021 (ONS data) in view of economic recovery. The UK public finances improved in view of strong tax revenues due to the economy having higher nominal GDP. The ONS data (24 May 2022) on public sector borrowing was 18.6bn (April 2022), below the 24.2bn of April 2021, in view of the UK economic recovery. 19

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References Angeriz, A., & Arestis, P. (2008). Assessing Inflation Targeting Through Intervention Analysis. Oxford Economic Papers, 60(2), 293–317. Arestis, P. (2012). Fiscal Policy: A Strong Macroeconomic Role. Review of Keynesian Economics, 1(1), 93–108. Arestis, P. (2013). Economic Theory and Policy: A Coherent Post-Keynesian Approach. European Journal of Economics and Economic Policies: Intervention, 10(2), 243–255. Arestis. (2021). Macro-Economic and Financial Policies for Sustainability and Resilience. In P.  Arestis and M.C.  Sawyer (eds.), Economic Policies for Sustainability and Resilience, Annual Edition of International Papers in Political Economy, (Palgrave Macmillan, 2021). Aslam, A., & Coelho, M. (2021). The Benefits of Setting a Lower Limit on Corporate Taxation, IMF Blog, 9 June 2021. Bailey, A. (2021). “It’s a Recovery, but not as we Know It”, Speech Given at Mansion House, 01 July 2021. Available at: www.bankofengland.co.uk/ news/speeches Bank of England (2021). “New Forms of Digital Money”, Bank of England Discussion Paper on CBDC, 07 June 2021. Barnett, M., Brock, W., & Hansen, L. P. (2021). “Climate Change Uncertainty Spillover in the Macroeconomy”, University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2021-90, 27, July, 2021. Available at: https://doi.org/10.2139/ssrn.3894705 Bartholomew, L., & Diggle, P. (2021). “Central Banks and Climate Change the Case for Action”, July 2021. Available at: https://ssrn.com/ abstract=3895605 Befinger, P. (2022). “Taking the Heat out of Energy Prices”, Social Europe, 07 March 2022. Bordo, M. D. (2021). Central Bank Digital Currency in Historical Perspective: Another Crossroad in Monetary History, National Bureau of Economic Research Working Paper 29171. Available at: http://www.nber.org/ papers/w29171 Broadbent, B. (2021). “Mismatch”, Speech Given at the Bank of England, 22 of July 2021. Available at: www.bankofengland.co.uk/news/speeches Chadha, J. S., Corrado, L, Meaning, J., & Schuler, T. (2021). “Monetary and Fiscal Complementarity in the Covid-19 Pandemic”, European Central Bank, Working Paper Series, No. 2588, September 2021.

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Eggertsson, G. B. (2006). “Fiscal Multipliers and Policy Coordination”, Federal Reserve Bank of New York Staff Reports, No. 241, New York: Federal Reserve Bank of New York. Eichengreen, B., EI-Ganainy, A., Esteves, R., & Michener, K. (2021). In Defence of the Public Debt Crisis. Oxford University Press. Fontana, G., & Sawyer, M. (2014). The Macroeconomics and Financial System Requirements for a Sustainable Future. In P.  Arestis & M.  Sawyer (Eds.), Finance and the Macroeconomics of Environmental Policies (pp.  74–110). Palgrave Macmillan. Gechert, S., & Heimberger, P. (2021). “Do Corporate Tax Cuts Boost Economic Growth?”, IMK Working Paper, No. 210, Hans-Böckler-Stiftung, May 2021. Georgieva, K. (2021). “Urgent Action Needed to Address a Worsening ‘Two-­ Track’ Recovery”, IMF Blog, 10 July 2021. Goodhart, C., & Pradhan, M. (2020). The Great Demographic Reversal: Ageing Societies, Waning Inequalities and an Inflation Reversal. Palgrave Macmillan. Gopinath, G. (2021). “Drawing Further Apart: Widening Gaps in the Global Recovery”, IMF Blog, 27 July 2021. Haldane, A. (2021). “Thirty Years of Hurt, Never Stopped Me Dreaming”, Speech Given at the Institute for Government, 30 June 2021. Available at: www. bankofengland.co.uk/news/speeches Haskel, J. (2021). “Will the Pandemic, ‘Scar’ the Economy?”, Online Webinar Speech, Given at the University of Liverpool Management School, 19 July 2021. Available at: www.bankofengland.co.uk/news/speeches Hein, E., & Martschin, J. (2021). “Demand and Growth Regimes in Finance Dominated Capitalism and the Role of the Macroeconomic Policy Regime: A Post Keynesian Comparative Study on France, Germany, Italy and Spain before and after the Great Financial Crisis and the Great Recession”, Review of Evolutionary Political Economy. Available at: https://doi.org/10.1007/ s43253-­021-­00044-­5 House of Lords. (2021). “Quantitative Easing: a Dangerous Addiction?”, Economic Affairs Committee 1st Report of Session 2021–22, 16 July 2021. IMF. (2021a). “World Economic Outlook Update”, IMF Survey, June 2021 IMF. (2021b). Fiscal Monitor: Database of Country Fiscal Measures in Response to Pandemic. IMF. Mutton, T. (2021). “Central Bank Digital Currency: An Update on the Bank of England’s Work”, Speech Given at the Future of Fintech Conference, 17 June 2021.

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Ramsden, D. (2021). “Navigating the Economy through the Covid Crisis”, Speech Given at the The Strand Group, King’s Business School, 14 July 2021. Available at: www.bankofengland.co.uk/news/speeches Saporta, V. (2021). “Emerging Prudential Lessons from the Covid Stress”, Speech given on the Bank of England Webinar, 21 July 2021. Available at: www. bankofengland.co.uk/news/speeches Saunders, M. (2021). “The Inflation Outlook”, Speech Given during an Online Webinar, 15 July 2021. Available at: www.bankofengland.co.uk/news/speeches Stansbury, A., & Summers, L.  H. (2020). “The Declining Worker Power Hypothesis: An Explanation for the Recent Evolution of the American Economy”, NBER Working Paper 27193, May 2020. Sawyer, M. (2022). Monetary Policy, Environmental Sustainability and the Climate Emergency. In L.-P. Rochon (Ed.), Central Banking, Monetary Policy and the Environment. Edward Elgar. Wolman, A.  L. (2021). “What Does the FOMC's Shift in Fed Funds Rate Target Language Mean?”, Economic Brief Series, Richmond Fed, No. 21-22, July 2021.

2 State Capitalism, Government, and Central Bank Responses to Covid-19 Bernadette Louise Halili and Carlos Rodriguez Gonzalez

1 Introduction The exogenous economic shock brought on by the Covid-19 global pandemic and health crisis has led to various outcomes around the world. This heterogeneity of impacts across countries has been in part due to immediate and varied responses to the crises, stemming from decisions made by national authorities. This study contributes to an emerging literature on macroeconomic policies in response to Covid-19 (Aizenman et  al., 2021; Apeti et  al., 2021; Benmelech & Tzur-Ilan, 2020; Elgin et al., 2021; Yilmazkuday, 2021). We investigate what factors determine extraordinary fiscal and monetary policy responses, as in emergency, immediate, and Covid-19-related, at the beginning of the pandemic in 2020 with attention paid to the explanatory power of state capacity contextualised through state capitalism (Zhang & Whitley, 2013; Carney,

B. L. Halili (*) • C. R. Gonzalez University of the Basque Country (UPV/EHU), Leioa, Spain e-mail: [email protected]; [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 P. Arestis, M. Sawyer (eds.), Prospects and Policies for Global Sustainable Recovery, International Papers in Political Economy, https://doi.org/10.1007/978-3-031-19256-2_2

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2016; Nölke, 2018; Wright, Wood, Musacchio, et al., 2021). As a political economy study, it provides an actor-centred focus on the role of the state by exploring implications of state capacity as an institutional variable on choice of extraordinary macroeconomic policy response during an unprecedented crisis and further, on the rise and return of state capitalism amid the global pandemic. We use ordered and binary probit econometric models to examine empirically macroeconomic, health, geographic, and institutional variables as determinants of extraordinary fiscal and monetary policy related to Covid-19. We use data for a sample of 40 countries from the onset of the global pandemic in the second quarter of 2020 until the fragile reopening of economies (Heinemann, 2022) in the fourth quarter of the same year due to the study’s focus on immediate and extraordinary response. We also propose a comparative approach to the experiences of advanced and emerging economies through the consideration of countries in the Organisation for Economic Co-operation and Development (OECD) and five member countries of the Association of Southeast Asian Nations (ASEAN-5). The study’s main contributions are thereby a novel and interdisciplinary approach to extraordinary government and central bank responses to the global pandemic, with prime focus on institutional determinants as well as an analysis of the emergence and persistence of varieties of state capitalism in the context of the pandemic-induced crisis and post-Covid-19 recovery. The study’s geographic focus, with the inclusion of countries in the Global North and the Global South, offers not only a non-Western centric perspective but also a wider overview of national experiences during the global pandemic. By situating state capitalism in the context of a global pandemic, the study also contributes to bridging the artificial divide between comparative political economy (CPE) and international political economy (IPE) and to reorienting the subfield’s macroeconomic perspectives. The remainder of this chapter is structured as follows. After this introductory section, a review of related literature on the broad concept of state capitalism across disciplines and a summary of relevant approaches to fiscal and monetary policy determinants are given. Both in normal times, as in excluding the 2008 Global Financial Crisis (GFC) and the Covid-19 pandemic or periods of big crisis that are not usual ones during

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a typical business cycle, and during the Covid-19 crisis are discussed in Sect. 2. Section 3 elaborates on the empirical approach to testing the study’s hypotheses, stylised facts related to Covid-19 experiences across advanced economies and emerging markets, the sample selection, findings, and interpretations of results. We also discuss future trajectories of varieties of state capitalism and policy recommendations. Conclusions, the study’s limitations, and avenues for future studies will be included in the final Sect. 4.

2 Theoretical Background and Related Literature The Rise and Return of State Capitalism In the first few months of the Covid-19 pandemic, notable differences in emergency responses were observed between advanced economies and emerging markets. Central banks in advanced economies imposed actions that halted US dollar appreciation and thereby allowed emerging markets to cut rates aggressively. A coordinated policy response between fiscal and monetary authorities in most emerging markets was thereby introduced, which was possible despite limited fiscal space (Aguilar & Cantú, 2020). For example, in ASEAN-5, a deficit burden-sharing arrangement with the Indonesian Ministry of Finance was announced by the Central Bank of Indonesia, facilitating the purchase of government bonds to finance fiscal response to the Covid-19 crisis. In the Philippines, Bangko Sentral ng Pilipinas purchased government bonds through a “provisional advance facility” (Pordeli et al., 2021, p. 97). Contributing factors to differences include pre-pandemic macroeconomic conditions and institutional settings, as well as cross-national containment and mitigation measures induced by the countrywide socially constructed realms of the disease1 (Capano et al., 2020).  Taking the equal epidemiological and biological nature of the Covid-19 virus across countries into account, country-specific social realms may include lifestyle and diet-related co-­morbidities, levels of social interactions, environmental factors, and state capacity (Capano et al., 2020). 1

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The study’s main hypothesis is that country-level institutional features influence the adaptation of extraordinary fiscal and monetary responses in the early months of the Covid-19 crisis. The fiscal and monetary policies have been larger in scale in the pandemic and in this study; they are considered extraordinary, especially in the case of targeted policies, due to not only the scale of responses but also the nature of their emergency introduction. We hypothesise that greater state capacity means greater fiscal policy-oriented state intervention and that smaller state capacity can put pressure on central banks to finance budget deficits through nonconventional monetary tools, thereby effectively putting the institutional separation between fiscal and monetary policy and central bank independence into question (Makin & Layton, 2021). We also propose a link between the emergence of varieties of state capitalism and cross-country variations in institutional variables related to state capacity, such as government effectiveness, rigorous and impartial public administration, and central bank independence. Depending on structural changes provoked by Covid-19 and extraordinary responses to it, the nature of state capitalism found across countries may converge towards specific interventionist or non-interventionist types. Different approaches to the broad concept of state capitalism in disciplines as political science, history, and economics have produced numerous definitions as well as corresponding theoretical and empirical concentrations. While there is a lack of complete consensus in defining state capitalism in existing literature, it can be concluded that the most important common grounding among contributions is how systematic, state intervention is, or state capacity, expressed in different forms and depths.2 For instance, Alami and Dixon (2019) generally refer to state capitalism as the involvement of the state in policy instruments, strategic objectives, institutional forms, and networks. Bremmer (2010) broadly defines the concept as a system in which the state is the main economic actor and markets are used primarily for political gains. Zhang and Whitley (2013) and Nölke (2014) define it as a type of state–business relation. Nölke et al. (2015), Carney (2016), and Nölke (2018) expand  See Hanson and Sigman (2020) for an overview of how state capacity is measured and defined in comparative political research. 2

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the concept as a state-led and state-permeated national variant, considering institutional complementarities at the country-level, within the Varieties of Capitalism spectrum. Musacchio et al. (2015) define wholly owned state-owned enterprises, the state as a majority investor, the state as a minority investor, and the state as a strategic supporter of specific sectors as four broad classifications of state capitalism and examine firm performance for each type relative to private firms and subject to country-level institutional contingencies. However, Alami et  al. (2022), in addressing ambiguities related to the use of the term across social sciences, clarify that state institutions, state interventions, and patterns of state-led development should neither be automatically classified as state capitalism nor be merely categorised as either strong or weak and should instead be accompanied by adequate definition and characterisation based on theory. These definitions and characterisations are related to different dimensions of state capitalism. With respect to political institutions, Aguilera et al. (2020) demonstrate the importance of the nature of institutions in examining how political ideology shapes the relationship between state ownership and firm performance. They consider the effectiveness of a state in implementing policy or state capacity and its limitations or political constraint. Ricz (2021) conceptualises a contemporary illiberal model of state capitalism that focuses on the consolidation of political power, considering emerging economies and post-socialist blocs after the GFC and acknowledging the existence of national varieties. With respect to the internationalisation of state-owned enterprises (SOEs), Cheung et  al. (2020) define the government as being progressively positive and impactful in decision-making, while Cuervo-­Cazurra and Li (2021) contrast views on the liability and advantage of stateness. Additionally, Wang et al. (2020) find that in emerging markets, enhanced firm innovativeness and profitability are contingent upon affiliation with different levels of government. State capitalism is also defined in terms of a government’s direct influence on economic relationships, which goes beyond fiscal, regulatory, welfare, and security roles (Wright, Wood, Musacchio, et al., 2021), or in other words, the different dimensions of state capacity seen through the overwhelming prominence of top-down approaches in response to the

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pandemic. In a related study, Wright, Wood, Cuervo-Cazurra, et  al. (2021) define state capitalism as a system in which the state disposes of different tools for proactive intervention in the economy and find that such interventions in markets come in different forms across different economic systems. To capture these varieties and complexities, they conceptualise state capitalism as being multidimensional, and not binary as in if a country follows state capitalism or not (Wright, Wood, CuervoCazurra, et al., 2021), thereby developing a framework in which heterogeneity is evidenced by positioning countries along defined dimensions. They determine three main mechanisms of state intervention in the economy as being state ownership, statist, and the degree of threat governments pose to the private market.3 Non-threatening governments exhibit high levels of perceived government quality, independence, credibility, and institutional barriers to unfavourable interventions made by governments to the private market sphere. State ownership takes investments and control of SOEs into account while statist qualifies interactions between business and governments using state subsidies and state consumption (Wright, Wood, Cuervo-Cazurra, et  al., 2021). Within this framework, eight resulting categories correspond to a combination of the three mechanisms, classified into interventionist and non-interventionist types, with extremes being interventionist entrepreneurial welfare states exhibiting high levels of government threat, statist, and state ownership and market-oriented states demonstrating low levels in all three dimensions. In an attempt to provide a functional framework that can synthesise different views on state capitalism, Alami and Dixon (2019) classify key and common arguments on its properties and practices under strategic management, comparative capitalism, and global political economy. They identify the theorisation, periodisation, and the location of state capitalism as three issues to be addressed in the further development of a productive analytical framework on state capitalist diversity. In addition, Alami and Dixon (2020) identify two gaps to be filled as being the  They add that these are broader in scope than previous management literature on state ownership and state-controlled capital while also encompassing tariffs, subsidies, and formal and informal networks as in other social sciences. 3

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determination of the constellation of actors involved in the promulgation of the new state capitalism narrative and the deepening of the understanding of changing landscapes of state intervention through a closer examination of practices across geographical settings. Addressing rigidities in previous research, the “new” state capitalism is conceptualised as a set of critical questions about the transformations in and the plasticity of the role of the state as “promoter, supervisor, regulator, and owner of capital” (Alami et al., 2022, p. 1) so that the category may be further used in empirical research. Interconnected dimensions of such a conceptualisation include examining the relations between economic and political power, characterising instances of state capitalism, comparing cases across countries, establishing the separation between politics and economy, and evaluating the changing role of state in capitalism (Alami et al., 2022).

 tate Capacity as a Central Component S of State Capitalism Contributing to building on a functional framework on state capitalism, we add that the ongoing debate is a lively one and the Covid-19 crisis presents itself as a natural experiment to observe the emergence of varieties and commonalities and to emphasise the state’s deep involvement in tackling socioeconomic challenges (Wright, Wood, Musacchio, et  al., 2021). Thus, we argue that varieties of state capitalism, as a framework that focuses on the mechanisms of state intervention and the centrality of state capacity in policy response, serves as an appropriate analytical starting point. Not just to understand how states have responded to economic and health crises induced by the global pandemic, but also to locate future trajectories of political economies post-Covid-19, especially with respect to the direction of macroeconomic and social policy. This allows for a conceptualisation and contextualisation of state capacity as a key component of state capitalism and thereby a precondition for macrolevel response. However, state capacity is a concept used across social sciences, defined and measured in different ways, and is closely related to other concepts that pertain to the many attributes of the state as an actor. State capacity

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has been used to advance various debates such as in growth and industrialisation for development economics and incentives for actors to invest in state capacity for conflict studies and game-theoretic political economy (Cingolani, 2013). A broad definition of state capacity is the ability of states to implement its goals and policies (Hanson & Sigman, 2020), despite facing barriers and opposition, which highlight the importance of “independent, rule-­following bureaucratic apparatuses” (Knutsen, 2013, p. 2). It is the infrastructural power of the state composed of human capital, fiscal strength, and reach or responsiveness (Schwartz, 2003), which, in terms of the direct influence of governments on economic relationships, would be the central component and mechanism for state capitalism to emerge and function. Infrastructural power pertains to the “institutional capacity of a central state, despotic or not, to penetrate its territories and logistically implement decisions” (Mann, 1993, p. 59). In terms of internal and administrative state capacity, it is the extent to which state agencies, which are efficient, impartial, and competent, enable governments to act in an appropriate and effective manner (Cronert, 2020). Three strands of state capacity have been proposed, in order to explain divergent responses to Covid-19 (Thurbon & Weiss, 2020; Weiss & Thurbon, 2021). A state’s extractive-­distributive capacity refers to the mobilisation of economic resources for redistribution, which becomes critical in times of lockdowns. A state’s transformative capacity is the mobilisation of the business sector when it comes to industry and innovation, and a state’s novel salutary capacity refers to how states are able to “correct and counteract the course of a national health emergency” (Weiss & Thurbon, 2021, p. 5). This conceptualisation of state capacity does not include normative conceptions on state action, approaches, and avoids conflating causal and constitutive relationships (Grassi & Memoli, 2015). Institutional arrangements in place at the country-level allow state capacity to function; however, this may not be the case in the context of extraordinary times such as the Covid-19 pandemic (Weiss & Thurbon, 2021). In addition, while both political choices compensating for institutional weakness, as in the case of early containment strategies like lockdowns and border closures (Weiss & Thurbon, 2021), and previous experience related to infectious diseases (Capano, 2020) can influence

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policy design and implementation during the Covid-19 crisis. We argue that an unprecedented global pandemic served as a unique challenge, especially at its early stages when little was known about the virus, so that state capacity is an overarching mechanism that determines extraordinary policy response. In short, policy responses to the simultaneous health and economic crises are strongly influenced by a country’s institutional settings, which would include state capacity (Capano, 2020). In the case of not just pandemics but also of natural disasters, states with great capacity, and that function well, may dispose of a larger set of policy tools and would not need extraordinary action, with discretionary and precautionary response based on necessity and proportionality rather than on political pressure (Cronert, 2020). Alternatively, natural disasters can exacerbate weak state capacity in the same way that governance and control can be disrupted by highly unpredictable pandemics (Koehnlein & Koren, 2022). In both circumstances, government resources are strained, decreasing state capacity. In addition, the operationalisation of state capacity is a key issue as there is more agreement in the literature about its conceptualisation than about how the nature of states is defined and their capacities measured (Grassi & Memoli, 2015). Empirical approaches have highlighted different constituent elements and dimensions of state capacity. In order to operationalise state capacity for applied research, it must first be identified, as either the dependent or independent variable, to establish either antecedents that determine it or factors that influence state action (Gomide et al., 2018). When using state capacity as an explanatory variable, it is important to identify attributes, arrangements, and instruments (Grassi & Memoli, 2015) that affect state action. However, some composite indices of state capacity used in applied research take into account its potential causes and predicted effects (Grassi & Memoli, 2015) and may therefore lead to conflated results. Taking Covid-19 into account, the operationalisation of state capacity considers different dimensions that affect policy response as variables that can be empirically measured and defined, with the effectiveness and impartiality of governments being highly correlated and theoretically distinct but compatible components. This is consistent with the use of state capacity interchangeably with governance, which is defined as “a government’s ability to make and enforce

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rules, and to deliver services, regardless of whether that government is democratic or not” (Fukuyama, 2013, p. 350). State capitalism is shown to emerge not just from the usual channels of state investment, or ownership, or because of institutionalised state-business relations in pre-pandemic times. Depending on the degree of intervention to guide the direction of economic stabilisation through policy, state capacity gains greater importance taking the context of Covid-19 into account. State-led capitalist varieties have been associated in the literature with Asian countries and developmental states (Carney, 2016; Nölke, 2018; Zhang & Whitley, 2013) as well as with welfare states and European countries, but the global crisis has shown that levels of state intervention, particularly in social policy, are rising worldwide. The varieties of state capitalism framework (Wright, Wood, Musacchio, et  al., 2021) suggest that pre-­pandemic, countries within ASEAN-5 are spread across different varieties of state capitalism. The Philippines and Indonesia are classified as interventionist states with above-median government threat to business and low statist and ownership levels. Thailand is found to be an interventionist entrepreneurial state with relatively higher levels of state ownership and Malaysia and Singapore are entrepreneurial states with high state ownership, low statist, and below-median government threats. For OECD members, there is a clear divide within higher income countries. Japan, the United States, the United Kingdom, and most European countries are shown to be either market-­oriented or welfare states defined by low ownership and government threat and distinguished by levels of statist. Relatively lower income countries such as Turkey, South Korea, Mexico, and some European countries are classified as mostly interventionist states or interventionist entrepreneurial states all featuring above-median government threat. Greece is singled out as an interventionist entrepreneurial welfare state with high statist and state ownership and above-median government threat. The type of state capitalism, whether associated with stronger or weaker state capacity, can have significant implications on macroeconomic policy during an unparalleled global crisis. A multidimensional view on state capitalism is therefore important as different levels of state capacity can lead to different degrees and forms of state intervention. Such interventions can pave different paths towards economic stabilisation and

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consequently lead to the emergence of varieties of state capitalism with different trajectories. Based on Covid-19 related interventions, made by national authorities and the dynamism of state capitalism itself, countries may converge towards different varieties of state capitalism post-pandemic. Countries that opt primarily for targeted social policies such as income support that rescue a segment of the population, especially if accompanied by related policy tools, may move towards interventionist welfare states with increased statist and non-threatening government. On the other hand, those whose fiscal systems are less developed and whose policy response depends mostly on central bank interventions, such as the purchase of government bonds, may become more non-interventionist market-oriented states with lower levels of statist. Countries that incorporate a mix of both may become interventionist entrepreneurial welfare states. As the Covid-19 crisis has shown through state interventions, there is a likely uptick not necessarily in state ownership but in statist, as well as a decrease in levels of government threat as targeted and extraordinary measures taken are non-threatening to business.

Government and Central Bank Responses to Covid-19 As suggested by the emergence of extraordinary government and central bank response to Covid-19, fiscal and monetary policy rules are suspended4 and it is therefore important to consider possibly new and unusual determinants of fiscal and monetary responses from a contextually appropriate perspective. For instance, existing literature on determinants that drive decisions on and indicators of the stance of fiscal policy under normal conditions have used quantitative approaches. In such studies, macroeconomic variables such as economic growth, lagged structural deficit and/or budget balance, inflation, unemployment,  We refer to suspension of policy rules in the general sense of unwritten rules and fiscal and monetary policy stances as measures that have been taken in response to the pandemic have been unexpected and in some cases, unprecedented, or, in other words, extraordinary. In the European Union fiscal rules are suspended; however, in the United Kingdom fiscal rules change regularly and in the United States there are no fiscal rules. For monetary policy, the policies of even lower interest rates and revival of quantitative easing were very similar to those adopted after the GFC, which could also be viewed as a suspension of rules. 4

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debt-to-GDP ratio, exchange rate regime, credit rating of countries’ sovereign bonds, and real long-term interest rates are accordingly introduced as control variables. Institutional factors include the following: quality of rule of law in countries and voice and accountability of governments from the World Governance Indicators (WGI). The size, political fragmentation, and strength of government, political ideology, maximum political distance in government, broad policy reform, upcoming elections, prior adjustments, and cabinet change or government crisis are some political features also used (Alesina et al., 1998; de Haan & Sturm, 1994; Giesenow et al., 2020; Lavigne, 2011; Mierau et al., 2007; Ziogas & Panadiotidis, 2021). For usual strategies of monetary policies, including both domestic targets, such as inflation targeting, and external regimes, such as exchange rates, some political and institutional determinants have been identified as central bank independence, government ideology, government consumption, political business cycles, depth of financial market, and polity scores (Alesina et al., 1997; Alesina & Stella, 2010; Belke & Potrafke, 2012; Cobham & Song, 2020); while controlling for macroeconomic variables such as economic output, output gap, trade openness, domestic savings, and past inflation. In contextualising determinants of responses to Covid-19, Greer et al. (2020) propose, due to the increased role of the state during the pandemic, social policy, regime type, formal political institutions, and state capacity as key foci. When referring to social policy, they argue that outside pre-existing policies, the success of public health measures that are more authoritarian in nature, like physical distancing or temporary economic shutdowns, depend on how much society complies with them.5 They also suggest that understanding Covid-19 politics requires a perspective on comparative authoritarianism. In considering regime type, which they add, pertains to a cluster of institutions in a state; authoritarian regimes may have difficulty maintaining the internal and external flow of good information and thereby struggle to implement actions effectively. Formal political institutions are defined as political institutions below the level of the national government and federalism and  This, taking into account how appropriate such measures are in light of the nature of the virus and its interaction with the countrywide social realm of the disease. 5

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presidentialism are two types that they outline when considering coordination and performance. They also highlight the importance of the strength of state capacity on determining response and shaping the space for available policy options. This is consistent with the framework on state capitalism and its focus on state intervention. Specific to the context of the pandemic, state capacity includes control over health care systems and public administration. A number of empirical studies on government and central bank responses to Covid-19 have proposed various hypotheses and put forward preliminary results. Benmelech and Tzur-Ilan (2020) investigate the determinants of fiscal and monetary responses across countries and find that high-income economies tended to announce larger fiscal policies and that credit rating is the most important determinant of fiscal spending during the health and economic crisis. They also find that the use of non-conventional monetary policy tools, such as central bank guarantees, asset purchases, and restrictions of dividend payments, is associated with high-income countries with historically low interest rates. In a similar study, Apeti et  al. (2021) evaluate how a country’s pre-­ pandemic fiscal space, measured as public debt-to-tax ratio and sovereign debt ratings, influences fiscal stimulus packages and find that higher ratings and tax revenues predict the size of fiscal stimuli, but not public debt as consistent with the results of Benmelech and Tzur-Ilan (2020). Aizenman et al. (2021) find that politics, measured using a set of country political risk indices, played a big role in determining the size and composition of fiscal programmes announced by governments in the first six months of the pandemic. Elgin et al. (2021) find through a cross-country panel data study that central bank independence determines policy response such that more independent central banks tend to adopt smaller policy rate cuts and give rise to larger fiscal and macro-financial packages as well. Additionally, Yilmazkuday (2021) shows that central banks of emerging markets or countries without a zero lower bound on their interest rates cut policy rates as a response to reduced economic activity and volatile exchange rates as induced by the pandemic, whereas advanced economies or countries with a zero lower bound on their interest rates did not do so. Bunyavejchewin and Sirichuanjun (2021) find, using different political and institutional proxies, that the regime type is related to

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government response to Covid-19, specifically that governance quality showed moderate impacts on policy implementation. Taking the Covid-19 pandemic and the resulting global phenomenon of state capitalism through the short-term extension of state prerogatives in related intervention (Alami et al., 2022) into account in this study, we propose, based on previous empirical studies mentioned, the consideration of macroeconomic, health, geographic, and institutional variables as determinants of macro-level policy response by governments and central banks. Macroeconomic controls include proxies for the business cycle, public debt, inflation targeting, and fiscal and monetary space. Health variables specific to the Covid-19 pandemic would include variables that capture the country-­specific social realm of the disease such as the vulnerable demographic, pandemic progression, and restrictions implemented. Geographic variables pertain to regional classifications as well as the implications of country borders. Institutional variables capture social policy, regime type, and various dimensions of the broad concept of state capacity as a central component of state capitalism.

3 Empirical Approach We empirically test which determinants matter for the indicators of the stance of emergency fiscal and monetary policies and thereby greater government and central bank response in an unprecedented and simultaneous global health and economic crisis. However, known conditions, assumptions, and conventional wisdom may not be wholly applicable due to the unparalleled nature of the Covid-19 crisis. Usual fiscal and monetary rules may be suspended and different expectations may be observed from prudent6 use of policy tools across countries in normal times. Institutions may play a big part in determining such responses and this empirical approach examines the explanatory power of state capacity  We refer to prudent use of policy as the sustainability of big expansionary measures taken, given the enormous increase in public debt that comes with greater expenditure. While there may be exceptions, in some countries, especially in emerging and developing ones, financial markets may start to consider the new large debt growth to be unsustainable, provoking a rise in sovereign risk premia and trap countries in a “bad equilibrium” of growing debt. 6

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across countries in addressing specific socioeconomic challenges posed by the Covid-19 pandemic through policy interventions. Dependent variables used in this study are targeted fiscal and monetary measures introduced in response to the Covid-19 global pandemic. They are extraordinary in the sense that they were introduced immediately after the declaration of the pandemic. The fiscal measure of interest is income support while the main monetary measure is quantitative easing.7 Emergency income support measures were collected by the Oxford Coronavirus Government Response Tracker (OxCGRT) from government announcements (Hale et al., 2021). Some examples are temporary short-time work and wage subsidy schemes; expansions of eligibility for unemployment benefits for self-­employed, sick, and quarantined employees; and direct co-payments to firms for payrolls. In this study, income support is an ordinal variable that records the extent to which governments cover salaries of those who lose their jobs or are unable to work. A value of 1 is assigned for no income support, 2 for less than 50% of lost or median salary if flat sum of income support, and 3 for more than 50%. We refer to the purchase of government bonds by the central bank as quantitative easing, although this definition may include other types of purchases across countries; used as a tool to increase the prices of such bonds and lower interest rates on affected loans. Data is taken from the Bank of International Settlements’ (BIS) global database on central banks’ monetary responses to Covid-19 and directly from countries’ central bank websites. The empirical approach aims to identify determinants for the implementation or non-­implementation of each of these chosen policies, not whether governments and central banks opt for one type of measure over another.

 While the use of quantitative easing is not extraordinary post-GFC, it is the extent to which central banks have used it as an instrument in response to the pandemic that is unprecedented. For the first time in a broader and synchronised manner, central banks conducted asset purchase programmes, targeting government or private sector bonds in local currency. For some central banks such as in Ghana, Guatemala, Indonesia, and the Philippines, the temporary easing of government financing pressure during the pandemic was specified as an objective (Drakopoulos et al., 2021). This study considers only the purchase of government bonds when referring to quantitative easing, but in some countries, it also involved the purchase of private financial assets. 7

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Determinants of Covid-19-Related Response This study proposes independent variables classified as macroeconomic, health, geographic, and institutional in nature taking the context of the global pandemic into account. 3.1.1 Macrovariables Consistent with emerging literature on government and central bank response to Covid-19 (Aizenman et  al., 2021; Apeti et  al., 2021; Benmelech & Tzur-Ilan, 2020; Elgin et al., 2021; Yilmazkuday, 2021), quarterly GDP growth and inflation are used as control variables for both fiscal and monetary policies. Debt-to-GDP ratio is added for fiscal response and a dummy variable for zero lower bound for central bank measures. Common to various macroeconomic perspectives, the Covid-19 pandemic came as a negative exogenous shock to aggregate demand and aggregate supply,8 which may be responded to, with counter-cyclical management through expansive macroeconomic policy, whether fiscal or monetary in nature. Thus, a negative sign is expected between GDP growth and discretionary and expansionary policy under normal conditions.9 With respect to government debt, it is considered a restriction that implies less fiscal space to do expansive policies and therefore a negative sign may be expected.10 However, implementing policy in normal times to maintain fiscal space is assumed to give insurance during financial crises, such as debt-to-GDP ratios, which may not necessarily determine domestic and international policy responses (Romer & Romer, 2019). Being in normal times that monetary policy is independent from fiscal policy and that the monetary authority has the goal of keeping  While the origin of this shock is supply side with production initially constrained in various ways, lockdowns on industries and sectors led to both aggregate demand and aggregate supply shocks with little to no consumption and production taking place in this short time period across countries. 9  One of the features of the pandemic was the quarter-to-quarter variation in GDP growth; at least in some countries, such as the United Kingdom, recession in the sense of two quarters of negative growth was actually avoided. 10  According to Apeti et al. (2021), there are no reverse-causality or endogeneity issues associated with using fiscal space, or more specifically pre-crisis levels of public debt, as a determinant of fiscal response when the dependent variable used pertains exclusively to surprise public spending related to an exogenous shock like Covid-19, or extraordinary fiscal response. 8

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inflation low and stable, including debt-to-­GDP as a variable in the reaction function of central banks, would not be appropriate.11 With a low and stable inflation being the usual goal of monetary authorities,12 a negative sign is expected for inflation when it comes to quantitative easing in normal times. Higher inflation should be accompanied with less or no quantitative easing as excessive buying of government bonds may inject too much money into the economy to expand it, thereby making inflation higher than desired.13 Fiscal policy may also react counter-cyclically to accelerating inflationary pressures in de facto coordination with monetary policy to face aggregate demand shocks; it is not so flexible and it has more time lags, due to the involvement of politics in decision-­making, but it is often a second line of defence when there is a negative shock to the economy. Thus, higher inflationary pressures should signal a reduction in government spending or an increase in government revenues to reduce aggregate demand, therefore leading to a negative sign. There are, however, complications related to the indirect effects which inflation has on government budget—inflation tends to raise expenditure particularly on pensions, benefits when indexed, and tends to raise tax revenue if the tax system is progressive with respect to nominal income. However, these outcomes may not necessarily be observed, as contractionary fiscal policies are politically costly especially at a time such as a global health and economic crisis. For monetary policy, apart from inflation, whether or not a country’s policy rate is at the zero lower bound or close to it is also considered as a proxy for monetary  Central bank independence, however, is considered for monetary response, as a control item, and to account for the relevant assumption. 12  Central banks, for instance the United Kingdom, New Zealand, Canada, Japan, Turkey, India, the Philippines, or Thailand, do follow an explicit inflation targeting strategy and others as the Federal Reserve or the European Central Bank that have recently modified their inflation targets (see, however, Jahan, 2012). 13  Alternatively, lower inflation rates should lead to greater policy rate cuts. This is because lower interest rates, being the main transmission channel of monetary policy, can lead to greater borrowing and spending, speeding up the economy and thereby raising inflation. Under normal conditions, the Taylor Rule is the reaction function of central banks regarding policy rates and the benchmark for monetary policy. It is used to evaluate whether or not monetary policy stance is in line with the prediction that monetary policy is tightened either as inflation rises relative to the central bank’s target or as actual output increases compared to its potential. Consistent with the objectives of this study, GDP growth is used for output gap and inflation rates for inflation gap, both accounted for as determinants of monetary response. 11

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space. Theoretically, a positive sign for the zero lower bound dummy variable may be expected for quantitative easing as non-­conventional policy tools could be implemented as fiscal stimulus when a conventional policy rate cut is no longer deemed feasible by the monetary space.14 3.1.2 Health. Due to the nature of the crisis, health variables are a novel consideration for choice of macroeconomic policy. While demographic variables have been included in studies of determinants of public expenditure, health variables related to Covid-19 are specific to the novel context of the pandemic. This, however, does not mean that such variables fit directly into the reaction functions of central banks or governments, only that in such specific and unparalleled circumstances, they may be taken into consideration. The proportion of the population over 65  years old, and confirmed deaths per one million people due to Covid-19, are included as variables pertaining to the social realm of the disease across states. We hypothesise that the greater the proportion of people considered most vulnerable to Covid-19 in terms of the population and the higher the fatality rate due to the disease, the more likely both the government and central bank would respond with their respective expansionary policies. This is so, in order to ensure the economy continues to function and to stabilise output despite the epidemiological evolution of the disease at the country-level. Stronger policy response may be triggered by higher Covid-19 prevalence due to its effects on the economy (Alberola et al., 2021). In terms of containment, the stringency index measures the restrictiveness of anti-contagion policies in place such as school closings, travel restrictions, and lockdowns, but not how effective their implementation may be. At times, the more stringent the measures especially at the beginning of the pandemic,15 the lower is the need for expansionary policies as there is less opportunity for the virus to spread and halt economic activity. However, it could also be that the  A negative relationship between zero lower bounds and policy rate cuts may be expected as policy rates being at the zero lower bound can cause a liquidity trap that limits the central bank’s capacity to act effectively. 15  More stringent measures can lead to more job losses but also have effects on unemployment, which are addressed through adopting supportive fiscal policies in the form of a rise in unemployment benefits as in many countries; for instance, the furlough scheme in the United Kingdom and temporary lay-off plan (ERTE) in Spain. 14

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more stringent the measures are, the greater the need for extraordinary and targeted fiscal and monetary measures; this is so since there is less opportunity for economic activity to continue. 3.1.3 Geography. A dummy variable for whether or not a country is landlocked is also considered in order to control for the ease by which countries can close geographic borders, especially at the start of the pandemic. Landlocked countries may not be able to mitigate the spread of the virus from neighbouring countries nor sustain economic activity as easily as isolated countries, and these factors may influence the type of response. In the case of members of the European Union with free movement of labour and the Schengen agreement, they were not able to close borders effectively at the beginning. However, border closures were crucial at the beginning of the pandemic in limiting the need for lockdowns and allowing countries to initiate contact tracing and testing systems (Weiss & Thurbon, 2021). Non-landlocked or isolated countries would also have less counter-cyclical policies as their measures have more effects. Alternatively, non-isolated countries may need lower levels of central bank or government stimulus. Non-isolated countries may be more greatly affected by the spread of the virus than isolated countries due to mobility of people and therefore more stimulus would be needed. In relation to this, considering the analytical focus of the study and the spatial and territorial spread of Covid-19 and its intergovernmental implications, a dummy variable for whether a country is part of ASEAN-5, as opposed to members of the OECD, is included. 3.1.4 Institutions. In this study, we argue that a functional institutional framework, one that allows the functioning of national institutions and thereby a national economy, should have a bigger reaction to an exogenous shock like a global pandemic. In addition, if a country does not react rationally, while having the necessary resources and capacity to do so, its institutional framework cannot be considered functional. As per the framework developed by Greer et al. (2020), social safety net, which proxies social policy; liberal democracy that proxies regime type; and government effectiveness, rigorous and impartial public administration, and central bank independence, which proxy state capacity, are considered institutional determinants of choice of extraordinary government and central bank response. Considering liberal democracy, governments that

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are more democratic could refrain from implementing certain types and sizes of fiscal policies in accordance with political barriers and mechanisms of checks and balances in place, while less democratic ones might do the opposite. Institutional safeguards in the form of larger social safety nets protecting households, pensioners, and the unemployed may allow governments to focus on measures for businesses (Alberola et al., 2021). In this study, state capacity as a central component of state capitalism is the main institutional feature of interest, and greater state capacity means greater state intervention. The main variable used in this study to proxy state capacity is government effectiveness, as taken from the WGI. It is defined as the perceptions of the quality of public and civil service as well as the government’s degree of independence from political pressures, the quality of policy formulation and implementation, and the credibility of commitment to such policies. An alternative variable for state capacity is taken from Varieties of Democracy (VDem), measuring rigorous and impartial public administration or the extent to which public officials are perceived to abide by the law without arbitrariness and bias. Thus, greater institutional quality in terms of government effectiveness and impartiality as proxies for state capacity translate to better choice of targeted policy on top of higher quality management and implementation. Additionally, greater government impartiality as a core feature of quality of government can lead to desirable outcomes at the macro-level (Suzuki & Demircioglu, 2020). Since the GFC, questions on central banks’ independence, defined as its capability to control monetary instruments, or alternatively, the restrictions to government influence on central banks (Garriga, 2016), have been raised as monetary policies have repeatedly adapted to fiscal policy. For instance, quantitative easing supports the expansionary needs of fiscal policy in the sense that it reduces long-term interest rates of bond emissions and therefore the long-run interest rates, with the procedure making money more clearly endogenous. Thus, greater central bank independence from the government means that the monetary authority may make decisions more freely from governments and the private financial sector. In some cases, as in the United Kingdom, the introduction of quantitative easing was a joint decision of the government and central bank, thereby lessening central bank independence. In addition, central

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banks enforce policies based solely on meeting their own internal and external targets, which under normal circumstances would mean bigger reactions coordinated with large fiscal policies. State capacity may also influence the speed and effectiveness of decision-making and implementation of decisions; it may also relate to implementation and effectiveness of policies such as lockdowns and quarantines. This may be captured by stringency index in regressions. Table 2.1 summarises the indicators used in this study as well as theoretical justifications.

4 Stylised Facts In order to illustrate differences across the experiences of advanced countries and emerging markets with an otherwise common threat, this study incorporates a comparative approach to ASEAN-5 (Singapore, Malaysia, the Philippines, Indonesia, and Thailand) and OECD countries across different regions. For instance, in Italy, a slow and chaotic national response was the product of predominant institutional arrangements and coordination mechanisms at the national level. Italy, particularly Northern Italy, was also the first hard-hit country in Europe at the onset of the pandemic. In South Korea, high capacity and previous related experience allowed for massive testing and tracing. In the Philippines, national security approaches were prioritised over containing the virus and minimising damage (Capano et al., 2020). With respect to economic outcomes, Fig. 2.1 shows the average quarterly GDP growth rate and confirmed Covid-19 related deaths, comparing OECD and ASEAN-5 countries from the onset of the global pandemic in the second quarter of 2020 until the fourth quarter of the same year. As can be seen, negative GDP growth rates were common to both groups at the beginning; however, OECD countries were able to see positive growth in the following quarter. Both groups show trends towards recovery over time although ASEAN-5 countries continued to lag behind. On the other hand, ASEAN-5 countries registered much lower fatality rates over all three quarters than OECD countries. In this regard, Capano et  al. (2020) highlight past experience with similar

Definition and measurement Business cycle

Number of confirmed deaths related to Covid-19 per million people.

Index calculated using mean score of metrics including school and workplace closures, cancellation of public events, closures of public transport, stay-at-home requirements, restrictions on internal movements, and international travel controls, with scores taking a value between 0 and 100.

Stringency index

Total population 65 years of age or older, based on the de facto definition of population, measured as percentage of total population.

Social realm of the World disease and Development vulnerable Indicators demographic Social realm of the OxCGRT disease and pandemic progression Social realm of the OxCGRT disease and pandemic restrictions

ADB, Eurostat

ADB, Eurostat

Asian Development Bank (ADB), OECD World Bank, OECD, Eurostat

Theoretical justification Source

Stock of government fixed-term contractual obligations Public debt and fiscal to others, measured as percentage of GDP usually on space the last day of the fiscal year. Change in prices of a basket of goods and services that Inflation targeting are typically purchased by specific groups of households, measured in terms of the annual growth rate and in index, 2015 base year. Dummy variable that takes the value of 1 for countries Monetary space with central banks’ short-term nominal interest rate at the zero lower bound or close to it and 0 otherwise.

Confirmed deaths

Health variables Population over 65 years

Zero lower bound

Inflation rate

Debt-to-GDP ratio

Macroeconomic variables GDP growth Value added created through production of goods and services in a country measured as percentage change from the same quarter of the previous year.

Indicator

Table 2.1  Indicators, definitions, theoretical justifications, and sources of explanatory variables

Dummy variable that takes the value of 1 for countries that are landlocked and 0 otherwise. Dummy variables that take the value of 1 for countries that are part of ASEAN-5 and 0 otherwise.

Source: Authors’ own construction

Institutional variables Social safety net Social expenditure comprising cash benefits, direct in-kind provision of goods and services, and tax breaks with social purposes, measured as percentage of GDP per capita. Liberal democracy The extent to which the ideal of liberal democracy is achieved, measured from a value of 0 being the lowest to 1 being the highest. Government Perceptions of quality of public and civil services and effectiveness degree of its independence from political pressures, quality of policy formulation and implementation, and credibility of the government’s commitment to such policies, measured from a value of −2.5 being the weakest and 2.5 being the strongest. Central bank Raw average of four components: chief executive officer, independence objectives, policy formulation, and limitations on lending to the government, measured from a value of 0 being the minimum and 1 being the maximum. Rigorous and The extent to which public officials abide by the law and impartial public treat like cases alike, or conversely, measured from a administration value of 0 being rampant arbitrariness and bias and 4 being very limited.

ASEAN-5

Geographic variables Landlocked

VDem

WGI

Central Bank Independence (CBI) index (Garriga, 2016) VDem

Regime type

State capacity

State capacity

State capacity

ADB, OECD

Compiled by authors Compiled by authors

Social policy

Region

Geography

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Fig. 2.1  Economic and health outcomes in ASEAN-5 and OECD in 2020. (Source: Authors’ own construction)

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diseases as in some Asian countries showing that the capacity of governments to learn from the past and thereby operationalise political support, taking national leadership, organisation of government and civil society, and blind spots, towards vulnerabilities of certain groups into account, which led to different government responses. Additionally, Serikbayeva et al. (2020), controlling for health variables, affirm that state capacity in attaining positive policy outcomes is associated with lower death levels from Covid-19. Figure  2.1 illustrates a trade-off between health and economy in the short run: ASEAN-5 countries were able to reduce health impacts and death levels in the first three quarters of the pandemic, while experiencing negative economic growth, whereas OECD countries were later able to generate positive economic growth while confirmed Covid-19 deaths rose in number. Figure 2.2 shows the cross-country relationship between the simultaneous evolution of the disease and government imposed restrictions on a quarterly basis from the immediate period after the onset of the pandemic in late March of 2020. While lower fatality rates may be attributed to more stringent measures, implying the potential endogeneity of Covid-19 deaths to government restrictions, Fig. 2.2 shows that no strong negative correlation can be observed across nations in the second quarter shortly after the pandemic was first declared. Nevertheless, countries above the line have more stringent measures than average given their number of confirmed deaths. In some countries, such as Spain, Italy, the United Kingdom, and the United States, relatively stringent measures were put in place but above-average fatality rates related to Covid-19 were still observed. Nevertheless, countries such as the Philippines and Colombia are seen to have more restrictive impositions and low fatality rates, consistent with preliminary empirical studies (Chisadza et  al., 2021), while Japan’s experience highlights a unique scenario of low death and stringency levels. In the third quarter, however, a clearer correlation is evident as countries in the sample cluster around lower stringency levels and fewer confirmed deaths. This implies that stringency levels in the previous quarter have come into effect to lead to corresponding mortality rates related to Covid-19. The fourth quarter of the year, however, paints a different picture: countries are more spread out, forming small clusters instead. More specifically, in the case of ASEAN-5 countries, all of them

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Fig. 2.2  Correlation between pandemic restrictions and progression in 2020. (Source: Authors’ own construction)

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Fig. 2.2  (continued)

have low numbers of confirmed Covid-19 deaths despite varying levels of stringency in measures. Malaysia and the Philippines exhibit high levels of stringency, Indonesia is in the middle, whereas Thailand and Singapore have relatively less stringent measures.

5 Data and Methodology The full sample used in this study comprises of 35 OECD countries and ASEAN-5 countries with available data16 (N = 40). Two separate sets of regressions are undertaken: first, a cross-section analysis at the onset of  The countries included in the sample are ASEAN-5 countries: Indonesia, Malaysia, the Philippines, Singapore, Thailand, and OECD countries: Australia, Austria, Belgium, Chile, Colombia, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Latvia, Lithuania, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, Slovakia, South Korea, Spain, Sweden, Switzerland, Turkey, the United States, and the United Kingdom. 16

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the pandemic in the second quarter of 2020 (t = 1) and then a panel estimation for all three quarters from April to June, July to September, and October to December 2020 (t = 3). The dependent variable is the extraordinary fiscal or monetary measure induced by the Covid-19 global pandemic. Probit regression as a discrete choice model to explain choices between policy alternatives in an unprecedented crisis is deemed appropriate. The health crisis came as a negative and exogenous aggregate demand and aggregate supply-side shock with no precedent, and so in response, national authorities implemented a range of discretionary policy choices that were also first seen at the onset of the pandemic. This also justifies the time period of the quantitative approach: the temporal scope is limited to the year 2020 and does not include data for the year 2021 as it seeks to examine emergency national policy responses only at the early stages of the pandemic, when little was known about the virus and prior to the approval and earliest introduction of vaccination programmes, which raised expectations about a viable exit and recovery path from the health and economic crisis. Extending the study to succeeding phases of the pandemic as in the gradual stabilisation of economies would take into account a different set of determinants based on the benefits of learning effects and consider long-run objectives (Heinemann, 2022). Probit regression, like logit, models ordinal or binary outcome variables, which in this study would pertain to the corresponding fiscal and monetary policy implemented that is related to Covid-19 response. The econometric techniques used are ordered and binary probit for the first set of country-specific regressions and random-effects ordered and binary probit for panel data for the second set, both as determined by the nature of the corresponding dependent variables as discretionary potential outcomes. In the case of panel data, it is used to consider cross-country heterogeneities as the pandemic progresses. Thus, the study’s baseline model can be written as: Pr  Response it    1  2 Macro it  3Health it  4 Geography it (2.1)  5 Institutionsit   it  ,

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where Eq. (2.1) considers vectors containing corresponding macroeconomic controls, health, geographical, and institutional variables as determinants of choice of extraordinary fiscal or monetary response, and i denotes country and t denotes time. The vectors for macroeconomic controls include quarterly GDP growth, public debt-to-GDP ratio, inflation relative to the previous level, and zero lower bounds, accordingly. We use quarterly change in GDP growth comparing 2019 and 2020 data of the same quarter and not of subsequent quarters in 2020 to consider previous growth rates17 as the short time period of the panel is a constraint to dynamic modelling of discrete choice and the allowance of lags. In the baseline model, health pertains to population over 65 years and geography includes dummies for landlocked and ASEAN-5 countries. The main institutional variable of interest is government effectiveness to proxy state capacity. However, central bank independence and rigorous and impartial public administration are also included. Interactive terms of state capacity variables with each other, other health, and institutional variables not initially included in the vectors are considered in succeeding estimations beyond the baseline model. Evidently, endogeneity issues may arise because of health variables affecting one another and being affected by other institutional variables. For instance, fatality rates due to Covid-19 may be affected by stringency measures and vice versa (Ferraresi et al., 2020; Greer et al., 2021). Likewise, stringency measures may also be dependent on the level of liberal democracy in a country. Hence, the aforementioned health and institutional variables are introduced separately in regressions when interacted with government effectiveness, rigorous and impartial public administration, or central bank ­ independence. Cross-country heterogeneities in response are also explained by differences in the timing, sequencing, and speed (Capano, 2020). The most consistent measure for time, considering all variables included in this study, is quarterly since the onset of the pandemic in the second quarter of 2020. In order to take quarterly periods into account, moving  This is done as data for the first quarter of 2020 also includes the first two months prior to the declaration of the Covid-19 outbreak as a pandemic in March 2020 and therefore do not account for the widespread implementation of restrictions affecting output across economies. 17

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quarterly averages are calculated for dependent variables income support and quantitative easing (both available daily), as well as independent variables, inflation rates (available monthly), zero lower bound, confirmed deaths, and stringency index (all available daily). Time-invariant variables and those only available annually are as follows: whether a country is landlocked and whether it is part of ASEAN-5, debt-to-GDP ratio, population over 65 years, social safety nets, liberal democracy, government effectiveness, rigorous and impartial public ­administration, and central bank independence. The constant value, data for the year 2020 or the most recent available year, is retained for all quarters. In order to approximate the probabilities of greater fiscal and monetary responses, while taking state capacity as given, the interactive terms of government effectiveness and central bank independence with each other and with institutional variable liberal democracy (annual data expressed as time invariant across quarters). Moreover, health variables confirmed deaths per million and stringency index (daily data expressed as moving averages per quarter) are considered. Social safety net and rigorous and impartial public administration, as well as their interactions, are also included.

6 Results and Interpretations The results of ordered and binary probit estimations for the second quarter of 2020 are reported in Table 2.2: The immediate containment phase at the onset of the pandemic in the second quarter of 2020 focused on interventions to mitigate the negative effects of the sudden reduction in economic activity. It is useful to assess cross-country immediate response to Covid-19 at a time when little was known about the virus and emergency response was vital. In particular, Table  2.2 shows that government effectiveness is a highly significant determinant of emergency fiscal and monetary response in this period. For income support, columns 1 and 2 show that only government effectiveness is statistically significant, implying that more effective governments were more likely to provide greater income support packages to workers affected by lockdowns as an extraordinary and immediate fiscal response and reinforcing the swift and short-run top-down approach by

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Table 2.2  Determinants of extraordinary fiscal and monetary response in Quarter 2 of 2020

GDP growth Debt-to-GDP Inflation

Income support

Quantitative easing

(1)

(2)

(3)

(4)

0.105 (0.816) 0.004 (0.007) 0.168 (0.113)

0.087 (0.831) 0.005 (0.007) 0.178 (0.112)

0.592 (1.33)

1.24 (1.49)

0.008 (0.064) 1.32** (0.533) 0.147 (1.48) 0.138 (0.164)

0.027 (0.077) 1.48*** (0.538) 0.176 (1.48)

−0.245 (0.152) 0.377 (0.812) 0.119 (0.074) −1.44** (0.648) 0.521 (1.48) 0.053 (0.188)

−0.217 (0.157) 0.206 (0.713) 0.177** (0.084) −1.16* (0.667) 0.475 (1.48)

Zero lower bound Population over 65 years Government effectiveness Central bank independence Confirmed deaths Stringency index

0.019 (0.036)

Constant /cut1 /cut2 No. of observations Wald chi2 Pseudo R2 Log-likelihood

0.366 (1.57) 1.64 (1.57) 38 14.89 0.24 −23.0

2.08 (2.90) 3.36 (2.93) 38 14.38 0.24 −23.3

0.893 (2.29)

0.057 (0.038) −3.18 (3.50)

38 12.19 0.27 −16.4

38 14.54 0.32 −15.22

Robust standard errors in parentheses Values in bold show significant results ***p