The impact of Covid-19 stimulus: The case of Australia

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Singh, Tarlok

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Kler, Parvinder S

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2024-01-16
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Abstract

The swift and immense shock of the coronavirus pandemic and subsequent containment measures have plunged the global economy into a severe contraction. Governments around the world have reacted with unprecedented financial injections, pumping enormous amounts of money in to help the staggered economy and those who have lost their jobs. This research investigates how the economic stimulus has affected Australia's macroeconomic performance and reviews policy measures undertaken by the government and central bank as a response to the COVID-19 crisis which include fiscal, monetary and exchange rate measures. The research shows that the stimulus had some remarkable short-term benefits of boosting demand and strengthening the economy, in particular employment, which has experienced an unexpectedly quick recovery. The empirical analysis identified a strong statistical correlation between rapid money growth and inflation in the observed period. The analysis also confirms the short to medium-term risk of the excessive economic stimulus to price stability. In addition to this, the research shows that global supply constrains are not the principal cause of inflation. On the contrary, high demand induced by excessive COVID-19 economic stimulus, was the key contributor to the inflation burst. The crisis and the economy capacity were somewhat misdiagnosed - too much money was directed towards households and injected into the overall economy. The output gap was not carefully estimated, and all of this led to an overheated economy. When the economy finally bounced back and the unemployment rate fell, prices began to rise. Inflation has quickly gone from being very low to being very high. The holistic analysis of the stimulus package adds to existing research by investigating the relationship between money stock, inflation and output. There is an ongoing economic debate over the usefulness and the size of economic stimulus as well as disagreement as to whether and under what circumstances stimulus packages trigger inflation. Some economists argue that large stimulus are necessary and policy makers should disregard inflation concerns (Kruger, 2021; Stiglitz 2020; Hawkins 2020). On the contrary, other economists fear that in the long run, economic stimulus can do greater harm than short-term good and spark inflation, even leading to hyperinflation (Summers, 2021), while some warn that higher inflation will persist (Furman, 2021). The research contributes to the current understanding of the role of the government and the central bank in softening external economic shocks and also adds to the existing literature by highlighting the link between rapid money growth, inflation and output.

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Thesis (Masters)

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Master of Philosophy (MPhil)

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Dept Account,Finance & Econ

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The author owns the copyright in this thesis, unless stated otherwise.

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economic stimulus

COVID-19

inflation

Australia

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