MONETARY AND FISCAL POLICY MIX AMID COVID-19 PANDEMICS AND THE ECONOMIC GROWTH PATH

Abstract

Purpose- We focus on the recent debate on policies enhancing the economic growth and query the crucial results of the modern growth theory implying a relationship between factor substitution elasticities and sustainably perpetual growth. Our study corrects the misinterpretation that the elasticity of substitution would be an engine for perpetual growth. We query the future path of the modern growth theory, its inconsistencies and possible policy tools amid extreme events where the Covid-19 pandemic deteriorated the global supply chains and total demand in the economy. Methodology- The study employs first order ordinary differential equations method. Findings- Finally, we propose a modeling of economic disequilibrium under extreme events causing demand and supply shocks. This model shows the conditions under which the equilibrium domain for the supply and demand functions cannot be converged. As an application, our results suggest that amid Covid-19 pandemics, U.S. fiscal policy and monetary policy do not optimally match and hence the fiscal policy should be calibrated. Otherwise, the economic growth path would be hampered sooner than expected. Conclusion- Therefore, we suggest policy implications to overcome these discontinuities. We believe that the extensive approach proposed in this study will be a source for different points of view. We hope that our results shed light on future empirical studies focusing on the remedies to increase growth rate. Keywords: Elasticity of substitution, production functions, economic growth, Covid-19, extreme shocks. JEL Codes: O40, O41, O42