Monetary policy

Martin Blomhoff Holm, Pascal Paul, Andreas Tischbirek, 31 March 2020

Empirical evaluations of monetary policy have traditionally focused on the responses of macroeconomic aggregates. Instead, this column uses detailed administrative data from Norway to uncover substantial heterogeneity in the effects of monetary policy at the household level. The authors find that not only low-liquidity households but also high-liquidity ones show strong responses. Interest rate changes faced by borrowers and savers feed into consumption, and indirect effects of monetary policy are sizable, but occur with a delay. While the results confirm several predictions of recent heterogeneous-agent New Keynesian models, they also provide new challenges.

David Miles, 30 March 2020

In response to the current economic crisis, central banks have embarked on operations to purchase huge quantities of government bonds. Accusations that these policies amount to ‘printing money’ or ‘helicopter drops’ are unfounded and misleading. This column argues that the asset purchase operations undertaken when interest rates are very low can help greatly in stabilising the economy. These actions allow governments to issue long-term bonds, incur low effective costs in the near horizon, and avoid volatile financial markets. 

Richard Barwell, Jagjit Chadha, Michael Grady, 29 March 2020

Doing ‘whatever it takes’ does not mean the Bank of England has to undermine long-run monetary and financial stability. This column outlines the options faced by the Bank of England in supporting the economy during the COVID-19 Crisis including closer coordination with fiscal policy.

Charles Goodhart, Manoj Pradhan, 27 March 2020

The authorities, like most of the rest of us, have been caught short by the sudden advent of the coronavirus pandemic, and are rightly rushing to limit unnecessary deaths. But in doing so, they are imposing a massive supply shock. This column asks what will happen when the lockdown gets lifted and recovery ensues, following this period of massive fiscal and monetary expansion. It argues that we will see a surge in inflation that can only be tackled once indebtedness has been restored to viable levels.

Lucrezia Reichlin, Dirk Schoenmaker, 26 March 2020

Fiscal and monetary policy coordination is not working in the euro area. This column argues that in order to rebalance the weight of both during major crises, the asymmetry between decision making at the ECB (by majority voting) and the ESM (by unanimity or qualified majority) must be harmonised. This is urgent since the ESM is the only instrument available to provide the common fiscal capacity needed to fight the COVID-19 pandemic.

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