Monetary policy effectiveness during pandemics

This thesis uses a calibrated New-Keynesian model to compare different monetary policy rules' effectiveness during in the context of the COVID-19 outbreak. It uses Taylor-type monetary policy rules which differ in degree of monetary policy inertia. It is found that both price stickiness and monetary policy sluggishness increase the loss of the monetary authority. The important point is that their effect is amplified when these two frictions are employed at once. We also find that a very high policy rate inertia in the central bank's policy function leads very significant losses in its loss function even if the central bank has the interest rate smoothing incentive. Hence, we conclude that when the economy experiences sudden turbulences like in the case of the pandemic, it gets even more important to actively respond to economic conditions.