Last week, Group of Seven finance ministers and central bank governors vowed to use "all appropriate policy tools" to contain the economic threat posed by COVID-19. The question left unanswered is what is appropriate, and what will work.
The immediate response took the form of central bank rate cuts, with the U.S. Federal Reserve fast off the mark. Though central banks can move quickly, however, it is not clear how much they can do, given that interest rates are already at rock-bottom levels.
Moreover, monetary policy can't mend broken supply chains. Unlike in 2008, when the problem was disruptions to the flow of finance, which central banks' liquidity injections could repair. the problem today is a sudden stop in production. Fed Chair Jerome Powell can't reopen factories shuttered by quarantine, whatever U.S. President Donald Trump may think.