Macroeconomics
Mohammad Hossein Jafari; Amineh Mahmudzadeh; Masoud Nili
Abstract
This paper examines the potential of government fiscal support in mitigating the consequences of shocks, particularly in relation to the infection rate of contagious diseases. The focus is on the emergence of Covid-19 and the various interventions implemented by governments to combat it. The study utilizes ...
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This paper examines the potential of government fiscal support in mitigating the consequences of shocks, particularly in relation to the infection rate of contagious diseases. The focus is on the emergence of Covid-19 and the various interventions implemented by governments to combat it. The study utilizes a cross-country analysis, using a dataset that includes government fiscal measures, infection rates, and selected institutional and economic metrics from different countries. To isolate the effects of vaccinations, the analysis is specifically focused on the year 2020. The findings indicate that a one percentage point increase in the ratio of direct government spending to GDP corresponds to an approximate 0.08 percentage point reduction in the confirmed infection rate. Given the average infection rate of 1.6 percent in 2020, this translates to a significant 5 percent decrease in infection rates. Additionally, the study reveals that the effectiveness of fiscal support measures is influenced by the institutional quality of the countries. Higher institutional quality is associated with greater effectiveness of fiscal support measures in reducing the infection rate. Furthermore, the study highlights that the impact of government spending on reducing the infection rate is enhanced when accompanied by the implementation of governmental rules.1.IntroductionWith the outbreak of the COVID–19 pandemic, countries faced with a widespread shock that precipitated health–economic crises. In an effort to curb the spread of the disease, governments implemented quarantine measures while concurrently endeavoring to aid vulnerable households and businesses, aligning citizens with restrictive policies. It is essential to note that government responses extended beyond financial support; a comprehensive set of policies was enacted to address the outbreak and its ramifications. In this respect, the present research aimed to study the impact of fiscal measures on the prevalence of COVID–19.The study investigated the hypothesis that government financial support may contribute to diminishing the prevalence of COVID–19. Should this hypothesis prove valid by drawing from the lessons learned during the COVID–19-induced shock, we can advocate for a more widespread application of fiscal policy tools in similar circumstances. This recommendation may extend beyond the conventional goal of stabilizing the macroeconomy, encompassing a proactive approach towards reducing infection rates. Yet a significant portion of the existing literature refers to the limited role of fiscal policies in stabilizing economy.The significance of this study lies in its quantitative assessment of the impact of monetary and fiscal policies, along with the identification of institutional factors that influence the scale and composition of supportive policies. This information can help policymakers to make necessary institutional changes, enabling a more adept response to potential future shocks.In line with the hypothesis testing, the research also investigated the impact of certain fiscal support measures adopted by governments on reducing the infection rate of COVID–19.2.Materials and MethodsDue to the absence of the necessary database for testing the research hypothesis, the researchers constructed a suitable database by amalgamating and refining data sourced from various databases, including research centers specializing in infectious diseases, the World Bank, and other international statistical institutions. The study used a cross-country panel analysis to measure the impact of fiscal policies while controlling for influential variables.3.Results and DiscussionThe study showed that the overall direct government expenditures aimed at combating the outbreak of COVID–19 had a significantly negative relationship with the confirmed infection rate. This finding demonstrates a satisfactory level of stability in relation to changes in the control variables.Furthermore, the study employed the rule of law index to measure the impact of institutional quality on the effectiveness of expenditures. The index did not show a direct correlation with the infection rate. However, the significance of the coefficient associated with the product of the rule of law and government direct expenditures suggests that enhancing institutional quality can increase the effectiveness of expenditures in reducing the infection rate.The analysis of the expenditures indirectly linked to health revealed that a one-percentage-point increase in the ratio of such expenditures to GDP led to a 0.13 percentage-point decrease in the confirmed infection rate. Given the average 1.6% infection rate in 2020, this translates to a 5% decrease in the infection rate.The research results indicate that support provided through grants to small businesses, aids to tenants, income support for households, and expenditures resulting from reductions in various tax bases or similar measures proved successful in aligning businesses and households with quarantine policies. Moreover, these measures demonstrated a relatively acceptable ability to reduce the infection rate. Considering the average ratio of 3.4% of these expenditures to GDP of countries, it can be asserted that with an approximately 30% increase in support (equivalent to a one-percentage-point increase in this ratio), the average infection rate has decreased by 5%, hence a decrease in the mortality rate.4.ConclusionThe research results indicate that fiscal policies, beyond their role in stabilizing the macroeconomy, remain a potent tool in the hands of policymakers. Appropriately employed, these policies have the potential to mitigate the adverse effects of severe shocks, such as the outbreak of a disease. Specifically, the research highlights the effectiveness of fiscal support policies adopted during the COVID–19 outbreak in aligning households and businesses with imposed restrictions. There was evident reduction in the infection rate, even when controlling for other influential variables. Furthermore, the study underscored the impact of institutional quality, measured by the rule of law index, on the effectiveness of government fiscal support. It suggests that fiscal support measures carried out within a robust institutional framework demonstrate greater effectiveness. Conversely, in contexts characterized by weak institutions, the effectiveness of fiscal support is diminished.
