Author(s): Nahid Kalbasi Anaraki
The COVID-19 outbreak hit the world economy with unprecedented consequences, which induced governments to intervene in the market and facilitate the recovery process. The bailout plans of advanced economies, though appropriate for short-term recovery, may have long-term adverse effects on budget discipline and inflationary expectations. Indeed, massive government interventions and bailouts will lead to huge amount of fiscal deficits, which may create inflationary expectations. The goal of this paper is twofold. First, it tries to estimate the effects of COVID-19 on economic growth, unemployment rate, consumption expenditures, industrial production, and GDP growth. Second, it tries to measure the long-term effects on budget deficit, and expected inflation, using Vector Error Correction (VEC) model with quarterly data for the period of 2009:1-2020:4 for the U.S. economy. The VEC model used in this study is superior to the VAR models used in previous studies. The estimated results in this study indicate that the budget deficit effect of this bailout will last at least for a period of five years and inflationary expectations will be lingering in the medium-term.
