Mobility Restrictions and Macroeconomic Policymaking in the Great Covid-19 Recession - A Panel Study on the Effect of Fiscal and Monetary Policy Announcements on Economic Activity in the Euro Area

Sammanfattning: The Covid-19 pandemic is in multiple ways a new type of crisis. The virus outbreak has had a serious impact on global health and has caused an economic downturn that is heavily driven by the restrictions implemented to attenuate the health-crisis. Apart from affecting the mobility of individuals, these restrictions impose additional constraints that policy makers need to adhere to when conducting macroeconomic policy as means of mitigating the negative economic effects of the crisis. This thesis investigates what role the level of restrictions play in the extent to which fiscal and monetary policy announcements are able to stimulate economic activity. This is done by estimating several random effects models using a daily panel dataset consisting of 18 euro area countries from 2020-02-15 to 2021-02-25. Interestingly, the results indicate a positive response in economic activity from fiscal policy announcements in the countries subject to the most stringent restrictions, and a negative response in the remaining countries. This suggests a reverse restriction-uncertainty relationship where uncertainty could be the driving force, which increases in surrounding countries as a response to more stringent restrictions in another. This could fuel a “wait and see”-behaviour which has a negative impact on economic activity. The effect of monetary policy is seen to differ across time, rather than across national levels of restrictions. This is suggested to occur due to the (brief) existence of positive animal spirit voiced in an initially positive response from expansionary monetary policy in all countries. This effect is later revised and turns negative, likely due to a Ricardian Equivalence-like response to the unconventional monetary policy interventions.