Phurichai Rungcharoenkitkul, Claudio Borio, Piti Disyatat, 22 December 2020

In recent years, a key challenge for central banks has been the shrinking room for policy manoeuvre as interest rates have declined to historical lows in many countries. The Covid-19 pandemic has inevitably exacerbated the problem. Once the worst is over, rebuilding policy space will be critical. This column presents a theoretical model in which the impact of monetary policy on financial vulnerabilities can complicate that challenge by constraining policy choices down the road. The model includes two realistic features typically excluded from standard setups: banks create money, and lending behaviour generates endogenous booms and busts. As it turns out, in such a framework the very notion of a natural rate of interest driven by saving and investment comes into question.

Tohid Atashbar, 13 April 2020

There is a growing trend as well as increasing public pressure in developing or emerging economies to follow the US and EU-led approaches to dealing with the coronavirus pandemic, without considering local economic settings. This imitation may lead to a worsening of the situation, especially if the pandemic were to last for a longer period of time. This column proposes a framework for a safer policymaking approach, especially for countries with a tighter policy space. Policy responses should be evaluated based on how the resources are generated and spent using a set of pre-defined criteria. 

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