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The likely substantial impact of COVID-19 related measures on the public finances of European countries has prompted an unprecedented call for new and significant policies at a European level to alleviate the pressures on individual Member States. The administrative closures adopted across most economies has resulted in a complete cessation of certain types of economic activity, a significant increase in unemployment and profound fiscal challenges for the countries in question. In this paper we use a SOE-DSGE model to assess the role the ECB can play in mitigating the negative economic and fiscal effects of the crisis for Ireland by participating directly in the sovereign debt management of the country. Our results indicate that the direct involvement of the ECB via sovereign bonds purchases increases the efficiency of the extraordinary fiscal stimulus packages that were put in place to combat the negative impact of COVID-19. A fiscal stimulus at the national level backed by ECB financing reduces the output losses in the first year which would otherwise occur. The reduction in the output loss ranges from 0.5 per cent to 0.7 per cent depending on the mix of fiscal policies chosen by the State. The cumulative reduction in output loss over a five-year horizon could sum to 1.4 per cent to 2.2 per cent depending on the fiscal policy mix chosen.

Sovereign debt after COVID-19: How the involvement of the ECB can impact the recovery path of a Member State