The Coronavirus Response: Why So Much Talk About The U.S.?

Over the course of the Covid-19 outbreak, and particularly in the last two weeks, the daily blog posts that Paul Eitelman and I have written have focused on the U.S. and the efforts of U.S. policymakers.

Why have we concentrated so much on the U.S.? It’s because of our belief that massive U.S. policy response is needed to ensure that the global downturn we’re experiencing does not turn into a permanent impairment to the global economy. Some of that perspective is informed by the fact that the U.S. economy is the largest in the world, and that as a country, the U.S. consistently runs a trade deficit. Put another way, America is a very large customer in the global economy, which means that permanent demand destruction in the U.S. has large impacts across the world.

Most of our focus on the U.S., however, is due to the fact that policymakers have more work to do in America to limit the damage of this crisis than in other developed countries. Comparing the U.S. to Europe helps illustrate why.

Monetary policy: the U.S. vs. Europe

Let’s start with monetary policy. The U.S. dollar is the principal reserve currency for the world. When crises such as the one we’re currently facing arise, there is tremendous demand for U.S. dollars. This demand is not limited to just America—importantly, it’s a demand seen everywhere in the world.

In order to make sure that global financial conditions do not tighten to the point where even more serious economic damage is done than has already occurred, the U.S. Federal Reserve (the Fed) has to ensure that there are enough dollars to meet this almost insatiable demand. Thus, the massive response of the Fed. Of course, the European Central Bank (ECB) and other central bankers have also responded to the liquidity needs of their constituencies, but the U.S. dollar occupies a unique place in the global financial system—and the Fed has recognized the responsibility of that privileged position.

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