Global macroeconomic cooperation in response to the COVID-19 pandemic: a roadmap for the G20 and the IMF

The COVID-19 crisis has caused the greatest collapse in global economic activity since
1720. Some advanced countries have mounted a massive fiscal response, both to pay
for disease-fighting action and to preserve the incomes of firms and workers until the
economic recovery is under way. But there are many emerging market economies which
have been prevented from doing what is needed by their high existing levels of public
debt and—especially—by the external financial constraints which they face. We argue in
the present paper that there is a need for international cooperation to allow such countries
to undertake the kind of massive fiscal response that all countries now need, and that
many advanced countries have been able to carry out. We show what such cooperation
would involve. We use a global macroeconomic model to explore how extraordinarily
beneficial such cooperation would be. Simulations of the model suggest that GDP in the
countries in which extra fiscal support takes place would be around two and a half per
cent higher in the first year, and that GDP in other countries in the world be more than
one per cent higher. So far, such cooperation has been notably lacking, in striking contrast
with what happened in the wake of the Global Financial Crisis in 2008. The necessary
cooperation needs to be led by the Group of Twenty (G20), just as happened in 2008–9,
since the G20 brings together the leaders of the world’s largest economies. This
cooperation must also necessarily involve a promise of international financial support from
the International Monetary Fund, otherwise international financial markets might take
fright at the large budget deficits and current account deficits which will emerge, creating
fiscal crises and currency crises and so causing such expansionary policies which we
advocate to be brought to an end.