Exogenous events, economic stimulus and its future trajectory

Abstract

The present worldwide COVID-19 pandemic demonstrates that our society is continuously faced with exogenous events. Looking at the past shows policy makers use monetary and fiscal policy to respond to these events; however, the jury is not out for the superior policy or combination of policies to react to exogenous events. The primary research question within this thesis is to determine the most effective and successful economic policy response to exogenous events by using insight from historical natural disasters, terrorist attacks and pandemics. The methodological approach taken within this thesis is a deductivism approach. Specifically, the analysis uses a methodological approach similar to that of an event study methodology. To analyse key macroeconomic variables within a two-year period post the exogenous event studied to analyse how macroeconomic variables responded to the economic response introduced as a result of the exogenous event or lack of, to determine any significant abnormal results. Furthermore, synthetic controls are used to study precautionary savings levels post the exogenous events. Overall, the primary conclusion of this thesis asserted that due to the indirect nature of monetary policy and its diminishing benefits it shall be treated as a defibrillator and not the rehab. Whereas fiscal policy should be the predominant tool used to recover from long-term exogenous shocks, with the key caveat being stimulus is targeted and governments are responsible for taking on debt when the economic benefits stack up.