Examining monetary policy measures and their impacts during and after the COVID era: OECD perspectives

Rathnayaka, Imalka Wasana; Khanam, Rashida; Rahman, Mohammad Mafizur Article Examining monetary policy measures and their impacts during and after the COVID era: OECD perspectives Economies Provided in Cooperation with: MDPI – Multidisciplinary Digital Publishing Institute, Basel Suggested Citation: Rathnayaka, Imalka Wasana; Khanam, Rashida; Rahman, Mohammad Mafizur (2024) : Examining monetary policy measures and their impacts during and after the COVID era: OECD perspectives, Economies, ISSN 2227-7099, MDPI, Basel, Vol. 12, Iss. 6, pp. 1-17, https://doi.org/10.3390/economies12060154 This Version is available at: https://hdl.handle.net/10419/329080 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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Economies 12: 154. https://doi.org/10.3390/ economies12060154 Academic Editors: Robert Czudaj and Ralf Fendel Received: 3 May 2024 Revised: 30 May 2024 Accepted: 12 June 2024 Published: 18 June 2024 Copyright: © 2024 by the authors. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (https:// creativecommons.org/licenses/by/ 4.0/). economies Article Examining Monetary Policy Measures and Their Impacts during and after the COVID Era: OECD Perspectives Imalka Wasana Rathnayaka 1,2,3,*, Rasheda Khanam 1,3 and Mohammad Mafizur Rahman 1,3 1School of Business, University of Southern Queensland, Toowoomba 4350, Australia; [email protected] (R.K.); [email protected] (M.M.R.) 2Department of Economics, University of Colombo, Colombo 00300, Sri Lanka 3Centre for Health Research, University of Southern Queensland, Toowoomba 4350, Australia *Correspondence: [email protected] Abstract: Governments worldwide implemented various fiscal and monetary measures to address the adverse impacts of COVID-19 on their economies. The paper aims to examine the changes in the monetary policy measures due to COVID-19 and their impact on macroeconomic variables. To explore this relationship, this study utilizes fortnightly data from 2020 to 2023 on the OECD (Organisation for Economic Co-operation and Development) countries. The study employs a Panel Autoregressive Distributed Lag (ARDL) model to analyze the effects of the monetary policy responses of the OECD governments, and the obtained results reveal that within OECD countries, the prevailing trend of lower interest rate policies emerged during the pandemic. This policy approach yielded a dual effect: lowering both output growth and inflation rates, while concurrently exacerbating unemployment rates throughout the COVID-19 period. Consequently, it is clear that monetary policies have played a pivotal role in facilitating the recovery from a profound economic shock such as the COVID-19 pandemic. Given the significant economic repercussions of a pandemic and the crucial role that monetary policy plays in sustaining economic stability, the apparent lack of attention underscores the urgent necessity for additional discourse on this vital subject. Keywords: COVID-19; monetary policy; economic growth; inflation; unemployment JEL Classification: F61; I18 1. Introduction The worldwide recovery from the COVID-19 pandemic is anticipated to continue throughout 2022 and 2023, driven by progress in global immunization efforts, the implementation of supportive macroeconomic policies in major economies, and favorable financial conditions. In response to the COVID-19 crisis, policymakers took significant legislative actions that involved providing substantial fiscal support to businesses and individuals, thereby preventing a deeper decline in employment, incomes, and productivity Dörr et al. (2022). The successful deployment of COVID-19 vaccines increased confidence among consumers and businesses, leading to a resumption of economic activities. This boost in economic confidence accelerated recovery, prompting central banks to revise growth projections upwards (Oskam and Davis 2023). On the other hand, in advanced economies, central banks and monetary authorities have implemented substantial measures to ease monetary policy, aiming to bolster the economy and attain their inflation targets. These measures include lowering interest rates and augmenting their government bond holdings as part of their reserve assets (Gertler and Karadi 2011). The primary objective of this research is to analyze the effects of monetary policy measures on key economic indicators, such as GDP (Gross Domestic Product), inflation, and unemployment, during the COVID-19 pandemic period and in the post-pandemic period. Economies 2024,12, 154. https://doi.org/10.3390/economies12060154 https://www.mdpi.com/journal/economies Economies 2024,12, 154 2 of 17 This study is motivated by inconsistent macroeconomic circumstances such as heightened levels of public debt, limited monetary policy flexibility, and the lasting effects on certain segments of the labor market. The most of OECD (Organisation for Economic Cooperation and Development) countries currently face an unparalleled economic situation in the wake of the profound aftermath of the COVID-19 pandemic. This predicament has been exacerbated by the surge in energy and food prices, driven by Russia’s invasion of Ukraine. Given these intricate circumstances, the necessity arises to meticulously identify both fiscal and monetary policy measures and their corresponding impacts. Many researchers (Deslatte et al. 2020;Kritzinger et al. 2021;Naudéand Cameron 2021) argue that governments and their economic policies have demonstrated a clear mishandling of the COVID-19 pandemic from the very start. This fact has become increasingly apparent over time. The concern lies in their current misinterpretation of the inflationary stage of the epidemic, which poses the significant risk of a recession. On the other hand, to mitigate demand, governments can consider reducing their own expenditures. Central banks have also taken measures to increase the cost of borrowing money, thereby curbing demand, as evidenced by the recent interest rate hikes in the U.S., Australia, and Europe (Song and Zhou 2020). Hence, an examination of how governments responded through monetary policy measures to address economic growth, inflationary pressures, and unemployment during both the COVID-19 period and the subsequent post-pandemic period becomes essential. Since this study is based on panel data analysis, employing a Panel ARDL (Autoregressive Distributed Lag) model for 33 OECD countries from 2020 to 2023, it is important to note that each country has different exchange rate policy regimes and interest rate policy decisions. This study does not account for these differences due to data availability and to avoid complexities. Therefore, it relaxes the conditions regarding exchange rate policy regimes and distinct interest rate rules for the monetary policies of each respective country. A pandemic is defined as a widespread outbreak of a contagious disease, typically affecting a vast geographic area and leading to profound societal and economic disruptions. Accurate policy decisions made by a country are of paramount importance in shaping economic growth, controlling inflation, and managing employment levels, especially in the face of such significant economic shocks. Monetary policy stands out as a critical factor in this equation, given that economic effects and challenges often persist even after the immediate health crisis subsides. Surprisingly, there has been a dearth of substantial discussion and focus on the specific question of how monetary policy should be conducted during a pandemic and in the post-pandemic recovery phase. Considering the substantial economic ramifications of a pandemic and the pivotal role that monetary policy plays in maintaining economic stability, this lack of attention underscores the pressing need for further discussion on this critical topic. The novelty of this research lies in its comparative analysis of the effectiveness and sustainability of different monetary policy responses across various OECD countries. It provides valuable insights into the evolving role of central banks in crisis management and contributes to the broader understanding of how monetary policy can be adapted to unprecedented global challenges. This paper is structured as follows: Section 2discusses the role of COVID-19 in the current economic problems and Section 3provides a literature review, while Section 4 describes the methodology. In Section 5, we examine the economic impact of the COVID-19 pandemic and the monetary policy responses, and we then discuss the deployment of fiscal policies during the COVID-19 crisis in OECD countries. Finally, Section 6concludes the study by summarizing the findings, presenting policy implications, acknowledging the limitations of the existing literature, and proposing avenues for future research. 2. The Global Economic Challenges during the COVID-19 Pandemic The global economy has experienced a profound impact due to the COVID-19 pandemic, resulting in widespread disruptions to historical growth trends in countries across the globe. Nevertheless, as most COVID-19-related restrictions and health measures are being lifted, economic growth is now showing signs of recovering and aligning with longer- Economies 2024,12, 154 3 of 17 term patterns. However, it is crucial to acknowledge that the economic consequences of the pandemic were evident from the beginning, and it has taken a toll on public health and human lives. Therefore, this unprecedented global crisis is widely acknowledged as the most significant economic shock witnessed in decades. The COVID-19 pandemic underscored the urgency of taking immediate action to mitigate its health-related and economic consequences, to safeguard vulnerable populations, and to establish a foundation for long-term recovery. It was crucial for all the countries, many of which confront formidable vulnerabilities, to enhance their public health systems, tackle the issues arising from informal sectors, and implement reforms that will foster robust and sustainable growth beyond the health crisis. For many economies, real GDP has reached or surpassed pre-pandemic levels observed in the fourth quarter of 2019. Nevertheless, there remains significant variation in economic progress across different countries (Jackson et al. 2020). The World Economic Situation and Prospects report underscores the continued repercussions of the COVID-19 pandemic, along with unattended macroeconomic structural challenges, which present substantial risks to the global economy. Projected for 2023, global GDP growth is anticipated to be 2.6%, marking the lowest annual rate since the global financial crisis, excluding the influence of the 2020 pandemic. However, there is a slight recovery expected in 2024, with growth predicted to improve to 2.9% (Seitzer et al. 2023). The economic consequences of the COVID-19 crisis vary across different regions. The extent of the impact is influenced by regional economic specialization in sectors that are directly or indirectly affected by the crisis, as well as the level of involvement in global value chains (Boyce et al. 2023). In 2022, the global economy witnessed a significant surge in inflation, affecting both developed and emerging economies. This increase in inflation was driven by a combination of global factors that contributed to and amplified the ongoing worldwide inflationary trend. The recovery of demand following the COVID-19 crisis, coupled with various supply challenges, played a key role in exerting pricing pressures on the economy (Hazakis 2022). The COVID-19 pandemic has had a notable impact on elevating inflation rates in numerous countries. Sectors that experienced significant disruptions due to lockdown measures, including recreation, accommodation, and transportation, have been major contributors to the inflation surge in 2022. In the contest of OECD countries, the inflation rate in the OECD area experienced a notable and considerable increase in December 2021 when compared to the same 12-month period in 2020. This surge in inflation was partially driven by a significant rise in Turkey’s annual inflation (OECD 2023). Within the OECD area, energy prices witnessed a substantial increase of 25 percent over the 12-month period leading up to December 2021. When excluding food and energy, OECD year-on-year inflation also rose sharply to 4.6% and made a significant contribution to headline inflation in several major economies. Looking at the entirety of 2022, the annual inflation rate in the OECD rose to 4.0%, a significant increase compared to the 1.4% recorded in 2021, marking the highest annual average rate since 2000. These statistics indicate that the global economy faces a myriad of challenges, including high inflation, tightening financial conditions across most regions, Russia’s invasion of Ukraine, and the COVID-19 pandemic. These factors are exerting significant pressure on economic prospects. The normalization of monetary and fiscal policies, which provided unprecedented support during the pandemic, is now dampening demand as policymakers aim to curb inflation and restore stability. Consequently, an increasing number of economies are witnessing a slowdown, and some even face contractionary growth. The future health of the global economy hinges critically on the precise calibration of monetary policy, the resolution of the Ukrainian conflict, and the potential for additional supply-side shocks stemming from the ongoing pandemic. The economic shocks of 2022 are exacerbating the ongoing economic scarring from the pandemic (Figure 1), particularly for all OECD economies. At the start of 2022, the pandemic’s severe impact on global GDP was already at a negative value of about − 0.05 percent by Q1 2023. Inflation increased from 4.4 percent in Q3 2021 to 10.39 percent in Q3 2022, before declining to 8.56 percent in Q1 2023. Prices in the third quarter of 2023 declined Economies 2024,12, 154 4 of 17 at 6.1 percent lower than in the same quarter of 2022. Rising inflation with declining real wages and declining unemployment characterized the macroeconomic situation in 2021 in many economies. Therefore, the lasting reduction of inflation will depend significantly on the determination of monetary policymakers. Economies 2024, 12, x FOR PEER REVIEW 4 of 17 conflict, and the potential for additional supply-side shocks stemming from the ongoing pandemic. The economic shocks of 2022 are exacerbating the ongoing economic scarring from the pandemic (Figure 1), particularly for all OECD economies. At the start of 2022, the pandemic’s severe impact on global GDP was already at a negative value of about –0.05 percent by Q1 2023. Inflation increased from 4.4 percent in Q3 2021 to 10.39 percent in Q3 2022, before declining to 8.56 percent in Q1 2023. Prices in the third quarter of 2023 declined at 6.1 percent lower than in the same quarter of 2022. Rising inflation with declining real wages and declining unemployment characterized the macroeconomic situation in 2021 in many economies. Therefore, the lasting reduction of inflation will depend significantly on the determination of monetary policymakers. Figure 1. Changes in Major Macroeconomic Variables Across OECD Countries. Source: OECD statistics (2023). On the other hand, the tightening of labor markets coupled with reduced labor supply in contact-intensive industries due to health concerns, changing worker preferences, and limitations on cross-border movement, has likely added to the inflationary pressures. Moreover, numerous service sector businesses that are particularly vulnerable to these obstacles may face insurmountable challenges, leading to an escalation in the risk of job losses and bankruptcies. Consequently, this could adversely impact overall demand in the economy. 3. Literature Review This paper contributes to the rapidly expanding literature on monetary policy reactions to the COVID-19 pandemic and the effectiveness of the policy measures in response. There are two main strands in the literature: the first investigates the theoretical background, while the second examines the impact of the COVID-19 shock on GDP growth, inflation rates, and unemployment due to monetary policy interactions and their effectiveness. According to Keynesian economic theory, swift government actions are considered crucial for stimulating demand and facilitating economic recovery during crises, as highlighted in prior research (van Aarle 2017). Keynes emphasized that a policy of government non-intervention would be a grave mistake, leading to a decline in economic output and prolonged suffering for millions of individuals (Byrialsen et al. 2021; Alozie et al. 2020). Consequently, both traditional and non-traditional economists seem to agree on the importance of combining short-term supply-side policies with traditional Keynesian Figure 1. Changes in Major Macroeconomic Variables Across OECD Countries. Source: OECD statistics (2023). On the other hand, the tightening of labor markets coupled with reduced labor supply in contact-intensive industries due to health concerns, changing worker preferences, and limitations on cross-border movement, has likely added to the inflationary pressures. Moreover, numerous service sector businesses that are particularly vulnerable to these obstacles may face insurmountable challenges, leading to an escalation in the risk of job losses and bankruptcies. Consequently, this could adversely impact overall demand in the economy. 3. Literature Review This paper contributes to the rapidly expanding literature on monetary policy reactions to the COVID-19 pandemic and the effectiveness of the policy measures in response. There are two main strands in the literature: the first investigates the theoretical background, while the second examines the impact of the COVID-19 shock on GDP growth, inflation rates, and unemployment due to monetary policy interactions and their effectiveness. According to Keynesian economic theory, swift government actions are considered crucial for stimulating demand and facilitating economic recovery during crises, as highlighted in prior research (van Aarle 2017). Keynes emphasized that a policy of government non-intervention would be a grave mistake, leading to a decline in economic output and prolonged suffering for millions of individuals (Byrialsen et al. 2021;Alozie et al. 2020). Consequently, both traditional and non-traditional economists seem to agree on the importance of combining short-term supply-side policies with traditional Keynesian expansionary measures to avert a recession and address price fluctuations during the current crisis (Eichenbaum et al. 2021;van Aarle 2017), Godri Pollitt et al. (2020). Throughout history, health pandemics have inflicted significant shocks on the U.S. economy. Examples include the flu pandemics of 1957 and 1968, which were followed by economic downturns, as well as the highly disruptive impact of the 1918 Spanish flu on society as a whole. The unique nature of a pandemic leads to both a demand shock, as consumers curtail their activities, and a supply shock, as businesses either close or scale back their operations. Additionally, the sudden onset of these extreme shocks provides Economies 2024,12, 154 5 of 17 little to no advance warning for consumers, businesses, or governments, resulting in a swift and pronounced shift in overall economic conditions (Wolf 2014). The global financial market faced intensified challenges due to the COVID-19 outbreak, prompting central banks in developed countries to implement unconventional measures to alleviate the adverse effects. It is crucial, both from an academic and policy perspective, to comprehend the consequences of the pandemic shock and assess the effectiveness of the implemented policies aimed at mitigating its impact (Karaman 2022). While some economists argue that nonconventional monetary tools may offset the effect of the lower bound and provide space for monetary policy (Bernanke and Yellen 2020), others suggest that, due to the changing nature of macroeconomics, the ability of monetary policy to accomplish much when interest rates are at their lower bound is limited (DeLong et al. 2012; Eichenbaum 2019;Corradin et al. 2021;Ortmans and Tripier 2021). Ortmans and Tripier (2021) present evidence that fiscal and monetary policy measures effectively lowered bond yields for European economies. In contrast, Lepetit and Fuentes-Albero (2022) studied the effects of an unanticipated decline in interest rates, concluding that monetary policy is likely to be ineffective at the height of the pandemic but should aid in sustaining the recovery in economic activity once the virus begins to dissipate. Further, the high inflation following COVID-19 is not transitory but persistent. The recent economic recovery and the excessive supply of money from fiscal and monetary policies have increased the core inflation rate beyond a temporary phase (Gharehgozli and Lee 2022;Lepetit and Fuentes-Albero 2022). Furthermore, conventional monetary policy has a minimal impact on GDP during pandemics, whereas unconventional monetary policy measures have the potential to mitigate the overall decline in GDP (Gertler and Karadi 2011). Yilmazkuday (2020) examines the effects of U.S. monetary policy, specifically policy rates, on exchange rates in 21 emergingmarket countries during the pandemic period. The findings indicate that a negative shock in U.S. monetary policy resulted in currency depreciation in emerging markets. Bhar and Malliaris (2021) discover that the Federal Reserve’s unconventional monetary policies, implemented in response to the 2008 financial crisis, could effectively reduce longer-term interest rates. They suggest that these findings hold valuable insights for central banks in addressing the financial and economic repercussions of COVID-19 (Bhar and Malliaris 2021;Yilmazkuday 2020). According to Wei and Han (2021), during the COVID-19 pandemic, neither conventional nor unconventional monetary policies had significant effects on all four financial markets: government bonds, stocks, exchange rates, and credit default swaps. However, unconventional monetary policies were slightly more effective than conventional policies, as they had some impact on the stock and exchange rate markets. On the other hand, the uncertainty effects of COVID-19 are much stronger, affecting aggregate demand, prices, the exchange rate, and the degree of trade openness, while complicating monetary policy interventions. In terms of regulating demand and curbing inflation, simulations conducted to assess monetary policy responses indicate that such policies are ineffective and would have no effect for at least 24 months (Andryushin 2020). Existing research on monetary policy primarily focuses on assessing its effectiveness by examining its impact on stock markets in various regions, including North America, Africa, Asia, and Europe. Therefore, there is a potential research gap in conducting a comparative analysis of the effectiveness of unconventional monetary policy measures across various regions or countries in mitigating the economic impact of pandemics, as well as examining the broader implications of different monetary policy strategies on key macroeconomic variables such as GDP growth, inflation rates, and unemployment rates during such crises. Moreover, none of these studies have addressed the influence of COVID-19-induced interest rate uncertainty on the transmission of monetary policy in OECD countries. (Phan and Narayan 2020). Consequently, this study aims to bridge this gap by scrutinizing the impact of monetary policy measures undertaken by OECD countries on the macroeconomy during both the COVID-19 era and the subsequent post-COVID period. The insights garnered from Economies 2024,12, 154 6 of 17 this investigation are intended to serve as a guiding framework for effectively addressing future pandemics or economic shocks of a similar nature. 4. Data and Methodology 4.1. Data Collection This empirical analysis relies on an extensive database at the country level that combines information on monetary policy measures and macroeconomic variables, as discussed in Table 1. In particular, GDP growth rate serves as a proxy for economic growth, while the consumer price index is used as a proxy for inflation rate. In both equations, real GDP growth is computed by calculating the monthly year-on-year percentage growth rates. The inflation rate variable is derived from the year-on-year percentage change in the consumer price index (CPI). Data were extracted from various sources, including the International Monetary Fund’s (IMF) macroeconomic and financial data, the Organisation for Economic Co-operation and Development (OECD), and the WHO’s Coronavirus data. Table 1. Brief discussion about selected variables. Variable Name Description Source Gross Domestic Product Growth Rate Gross domestic product growth–expenditure approach World Bank: World Development Indicators, Our World in Data Unemployment Unemployment, total (% of total labor force) World Bank: World Development Indicators, Our World in Data Interest Rate Monetary policy-related interest rate International Financial Statistics (IFS) Exchange Rate The relative price of currency expressed in terms of USD International Financial Statistics (IFS)—Currency exchange rates, monthly average Economic Uncertainty World Uncertainty Index International Monetary Fund (IMF) macroeconomic and financial data Gross Fixed Capital Formation Gross fixed capital formation as a percentage of GDP OECD Statistics Government Expenditure Total government expenditure as a percentage of GDP OECD Statistics Consumer Price Index Consumer price index percentage change in the same period of the previous year OECD Statistics 4.2. Sample Selection The Organisation for Economic Co-operation and Development, abbreviated as OECD, is an international organization of 38 countries committed to democracy and the market economy. We included all 33 countries based on the availability of data. The study included Australia, Austria, Belgium, Canada, the Czech Republic, Denmark, Finland, France, Greece, Hungary, Iceland, Ireland, Italy, Korea, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak Republic, Spain, Switzerland, Türkiye, the United Kingdom, United States, Argentina, Brazil, Chile, Indonesia, Israel, Slovenia and South Africa. These countries represent a diverse range of economic structures, levels of development, and policy frameworks, making them a valuable sample for analyzing macroeconomic trends and policy responses. By including data from a broad range of OECD countries, the study aims to capture diverse experiences and variations in policy responses to the COVID-19 pandemic across different regions and economic contexts. The study’s timeframe utilizes fortnightly data, derived from the OECD statistics database, spanning from January 2020 to December 2023. Quarterly data was converted to a fortnightly basis using EViews software. Economies 2024,12, 154 7 of 17 4.3. Methodology The empirical literature has primarily focused on three key aspects: the impact of interest rates on money markets though monetary policy, and their effects on macroeconomic variables such as GDP growth, inflation and unemployment. This study employs a balanced panel dataset and a panel ARDL model to analyze the relationship between key macroeconomic policy targets. This model enables the differentiation between short-term and long-term effects. In other words, it makes it possible to examine how variables adjust toward short-term and long-term equilibrium conditions. The ARDL model allows intersection points, short-term coefficients, and error variances to change freely between groups but keeps the long-term coefficients the same. The PMG (Pooled Mean Group) estimator enables us to investigate long-term homogeneity without imposing homogeneity of parameters in the short term (Pesaran et al. 1999). The considered time period is sufficient to obtain meaningful results because the ARDL approach is suitable for generating both short-run and long-run elasticities from a small sample size (Duasa 2007;Narayan 2004). As per the theory of the monetary policy transmission mechanism, multiple channels exist to elucidate the impact of monetary policy on real sectors or on overall economic progress (Prabheesh and Kumar 2021). These channels encompass mechanisms that are perceived to operate via the influence exerted by central bank monetary policy instruments including, but not limited to, the interest rate, credit supply, exchange rate, and expectations (Chundakkadan and Sasidharan 2020). Therefore, the model examines the impact of conventional monetary policy, demand and supply shocks, inflation, and short-term growth dynamics. By separately accounting for the GDP growth, inflation and unemployment, the study disentangles these factors from pure supply and demand shocks, respectively. This separation allows for a more precise analysis of their individual effects within the structural theoretical framework. Yit =β0+β1rit +β2kit +β3exeit +Xit +εt(1) Yit =β0+β1rit +β2kit +β3exeit +β4(rxkxCOVIDDum)+Xit +εt(2) where Y it indicates a dependent variable, where it denotes gross domestic product growth, inflation, and the unemployment rate. β0 is the intercept; t denotes time, idenotes country and εt stands for an error term. Likewise, “r” denotes the interest rate, “k” stands for uncertainty measured by a volatility index (it is implied volatility as measured by the VIX index can be interpreted as the market’s expectation of risk) and “exe” stands for exchange rate. To capture monetary shocks by incorporating both the interest rate and inflation rate, the study employs the above model by replacing the dependent variable ( Infit ) with the inflation rate (Equation (2)). Further, inflation is proxied by the consumer price index, interest rates are proxied by the lending rate and exchange rates denote the value of the country’s currency used for conversion to the US dollar. To comprehensively analyze the actual impact, the fundamental Equation (2) is augmented with two additional variables: cyclical unemployment (unp), denoting the disparity between unemployment and the natural rate, and expected inflation (Inf_Ex) as control variables. Further, to identify short-term aggregate supply changes, the study uses a third equation by replacing the dependent variable (unpit) with the cyclical unemployment rate. In order to accurately ascertain the real impact, the equation incorporates GDP growth and the inflation rate as control variables. Examining the impact of COVID-19 uncertainty on monetary policy effectiveness was captured by the triple interaction term (r*k*COVID_Dum), where COVID_Dum stands for a dummy variable that takes the value of 1 for the COVID-19 pandemic period and 0 for other periods. All variables in the models are expressed in logarithmic form. Economies 2024,12, 154 8 of 17 Firstly, the study examines cross-sectional dependency (CD) through the use of LM tests, namely those by Pesaran et al. (2004) and Breusch-Pagan test. These tests are performed to counteract panel data issues and ensure the robustness and consistency of the estimators (Pesaran et al. 2004). In addition, the study performs stationary tests for both dependent and independent variables using unit root tests. Generally, an augmented Dickey–Fuller test is conducted to identify non-stationarity in time series data. The panel unit root test makes it possible to investigate the mean reversion in the panel. It is essential to identify the level of integration among the variables, to pursue time series-based OLS regression and to avoid spurious regression models. Next, optimal lag selections using the unrestricted model and an information criterion were used to decide the choice of lags for each group per variables. Then, the panel cointegration test was used to determine the possibility of establishing a long-run equilibrium relationship between the variables. The deviation of the system from equilibrium at any given point is referred to as the equilibrium error. The Pedroni and Kao tests are based on Engle and Granger’s (1987) two-step (residual-based) cointegration tests. The Engle and Granger (1987) cointegration test is based on an examination of the residuals, to check whether a spurious regression is performed using I(1) variables. If the variables are cointegrated then the residuals should be I(0). On the other hand, if the variables are not cointegrated then the residuals will be I(1). Pedroni (1999,2004) and Kao (1999) extended the Engle-Granger framework to test panel data. This paper employed the Pedroni (Engle–Granger-based) and Kao residual cointegration tests to assess the feasibility of producing a panel ARDL model. Finally, the study uses the Hausman test to indicate the null hypothesis of homogeneity based on the comparison between the mean group (MG), and the pooled mean group (PMG) estimators. The testing of the ARDL approach consists of two steps. The first step is to check the existence of a long-run cointegration relationship among the variables. If cointegration is established, the second step is to estimate the longand short-run coefficients. If the cointegration is rejected, the second step converges to the estimation of short-run coefficients only. Then, as ARDL assumes no serial correlation, an appropriate lag length (m) should be considered. The study estimates the ARDL model based on Akaike’s information criterion (AIC). As a robustness test, this study uses the panel ARDL pooled mean group (PMG) method as it allows constant term, error variance, and short-run parameters to vary among panel countries. However, it assumes that the coefficients of the long-run relationship are constant across countries. The PMG estimator considers both pooling due to the homogeneity constraints on the long-run coefficients and averaging across countries to obtain the means of the estimated values of the error correction coefficients and short-run coefficients of the model. Due to its incorporation of both pooling and averaging strategies, this model outperforms dynamic ordinary least squares and completely modified least squares methods. Further, this panel regression can be expressed using the ARDL (l and g) technique, according to Pesaran et al. (1999), where “l” is the lag of the dependent variable and “g” is the lag of the regressors. This can be expressed mathematically as follows: (Pesaran et al. 1999, #159) Yi=∑l−1 j=1αijβij,−j+∑g−1 j=0µijXi,−J+ρi+εit (3) In the given context, where “i” represents the number of countries and “t” denotes the period, the vector “Y t ” consists of dependent variables, including GDP growth rate, inflation rate, and unemployment rate, represented as a (k × 1) vector. Meanwhile, X i is a matrix of explanatory variables, with an order of (T × k), encompassing variables such as interest rate, uncertainty rate, exchange rate, and an interaction term between interest rate and uncertainty index, and dummy variables. Additionally, the variable ρi represents fixed effects accounting for country specific characteristics, while εit is an error term, capturing unexplained variations in the model. Economies 2024,12, 154 15 of 17 Author Contributions: Conceptualization, I.W.R., R.K. and M.M.R.; methodology, I.W.R.; software, I.W.R.; validation, R.K. and M.M.R.; formal analysis, I.W.R.; writing—original draft preparation I.W.R.; writing—review and editing R.K. and M.M.R. All authors have read and agreed to the published version of the manuscript. Funding: There were no sources of funding used to prepare this study. Institutional Review Board Statement: Not applicable. Informed Consent Statement: Not applicable. Data Availability Statement: The data that support the findings of this study are available from the websites of the International Monetary Fund, the Australian Bureau of Statistics and the Australian Institute of Health and Welfare. Conflicts of Interest: The authors declare no conflict of interest. References Alozie, Chris Enyioma, Abel O. Ideh, and Innocent Ifelunini. 2020. 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