Bill English, Ángel Ubide, 04 June 2021

How well has monetary policy coped with the challenge of Covid-19?Central banks get good grades in a new VoxEU ebook. But Bill English and Angel Ubide warn Tim Phillips that success today may lead to problems in future.

Download the new eBook here: Monetary Policy and Central Banking in the Covid Era

Bill English, Kristin Forbes, Ángel Ubide, 03 June 2021

As Covid-19 spread in early 2020, many central banks were still struggling to boost inflation. The abruptness and speed of the economic deterioration, the sharp increase in market volatility, and the blinding uncertainty over the impact of the pandemic motivated a central bank reaction that was unprecedented in terms of size, speed and scope. A new CEPR eBook summarises the responses by sixteen central banks from both advanced and emerging economies – with chapters written by senior central bank officials and economists in each of the countries to explain the actions taken. While responses varied across countries, there are several common threads: the size, speed and breadth of the responses; the reliance on a more multidimensional set of tools; and the ability of emerging markets to behave more like advanced economies.

Stephen Cecchetti, Paul Tucker, 01 June 2021

Since the Global Crisis, the size of central bank balance sheets has grown significantly. Traditional goals of price and financial stability are insufficient for assessing the success of modern central banking operations. This column introduces a new framework for categorising and understanding central bank balance sheet operations. Monetary policy decisions are separated from facilities for lender of last resort, market maker of last resort, providing selective credit, and ensuring emergency government financing. To maintain legitimacy and accountability, central banks should formally distinguish these operations by clearly setting out their purposes, objectives, and constraints. 

Patrick Bolton, Harrison Hong, Marcin Kacperczyk, Xavier Vives, 25 May 2021

The Covid-19 pandemic and recession have reinforced the need to evaluate the economic and financial impact of natural disasters, providing a pointer to the damaging effects that climate change may induce. This column introduces the third report in the Future of Banking series from the IESE Business School and CEPR, which explores the ways in which natural disaster risks are different from more familiar forms of financial risk – and how banks, asset managers andcentral banks are beginning to grapple with these risks. The authors call for a combination of public interventions and private sector mitigation strategies to reduce the long-term implications of climate-related events.

Asger Lau Andersen, Niels Johannesen, Mia Jørgensen, José-Luis Peydró, 19 April 2021

Who gains – and by how much ­– when central banks soften their monetary policy regime is a key policy question. This column discusses new evidence on the distributional effects of monetary policy based on detailed administrative household-level data. The authors show that the gains from lower policy rates exhibit a steep income gradient, with the increases in income, wealth, and consumption modest at the bottom of the income distribution and highest at the top. 

Joshua Aizenman, Hiro Ito, Gurnain Kaur Pasricha, 08 April 2021

Facing acute strains in the offshore dollar funding markets during Covid-19, the Federal Reserve implemented measures to provide US dollar liquidity. This column examines how the Fed reinforced swap arrangements and established a ‘financial institutions and monetary authorities’ repo facility in response to the crisis. Closer pre-existing ties with the US helped economies access the liquidity arrangements. Further, the announcements of the liquidity expansion facilities led to appreciation of partner currencies against the dollar, as did US dollar auctions by foreign central banks. 

Yasin Mimir, Enes Sunel, 05 April 2021

Central banks in emerging economies deployed asset purchases for the first time to respond to the Covid-19 shock. Initial studies have found quantitative easing reduced long-term bond yields in these economies without creating bouts of currency depreciation. This column argues that asset purchases ease financial conditions in emerging economies by curbing capital outflows enabled by stronger bank balance sheets upon the asset intermediation by the central bank. If asset purchases cause a de-anchoring in inflation expectations, their effectiveness diminishes. Counterfactual policy experiments reveal that bond yield reductions from asset purchases during the pandemic could have persisted only under large-sized programmes that are representative of advanced economies.

Alexander Dietrich, Gernot Müller, Raphael Schoenle, 22 March 2021

Climate change has emerged as a major challenge for central banks, although its extent and the immediate consequences are highly uncertain. This column uses a survey of over 10,000 US consumers to show that irrespective of when and how climate change actually plays out, what matters for monetary policy is how people expect it to play out. Central bankers ignore the expectations channel of climate change at their peril.

Gene Ambrocio, Andrea Ferrero, Esa Jokivuolle, Kim Ristolainen, 06 March 2021

Central banks often have inflation targets at the centre of their monetary policy regimes. This column presents survey data from 613 leading economists to explore their views on these inflation targets and wider policies within their countries of residence. The results suggest that maintaining the prevailing inflation target (for central banks that have one) has more support than changing it does. But more respondents are pessimistic about central banks’ ability to meet these targets, particularly in the euro area.

Dirk Niepelt, 05 February 2021

The role of central bank digital currency is increasingly being discussed, both in terms of its utility in monetary policy as well as the controversy of bank-level profit from money creation. This column presents a method for quantifying the funding cost reduction enjoyed by banks, highlighting that money creation substantially contributes to profits. This raises important questions for policymakers to address as they seek to optimise the deployment of digital currencies within financial institutions.

Moritz Schularick, Lucas ter Steege, Felix Ward, 12 January 2021

The question of whether monetary policymakers can defuse rising financial stability risks by ‘leaning against the wind’ and increasing interest rates has sparked considerable disagreement among economists. This column contributes to the debate by studying the state-dependent effects of monetary policy on financial stability, based on the ‘near-universe’ of advanced economy financial cycles since the 19th century. It shows that deploying discretionary leaning against the wind policies during credit and asset price booms are more likely to trigger crises than prevent them.

Paweł Baranowski, Wirginia Doryń, Tomasz Łyziak, Ewa Stanisławska, 22 October 2020

To achieve macroeconomic stabilisation, central banks attempt to manage the expectations of the private sector. Decisions on short-term interest rates and communication can both impact expectations, but communication is especially important under the effective lower bound, when the room to move interest rates down is limited. Using data from Poland, this column shows that while monetary policy shapes the expectations of the private sector through both communication and interest rate decisions, the impact can differ depending on the variable forecasted and on the forecasting horizon.

Eric Lonergan, Megan Greene, 03 September 2020

The low interest rate environment since the Global Financial Crisis has led economists and analysts to suggest that major central banks have run out of monetary policy tools with which to face major downturns, including the Covid-19 crisis. This column argues that a dual interest rate approach could help to eliminate the effective lower bound and given central banks infinite fire power. By employing dual interest rates, central banks can go beyond targeting short-term interest rates and providing emergency liquidity to provide a stimulus across the economy. As political support for fiscal stimulus in the face of the Covid-19 crisis wanes, central banks can and should step in with overwhelming force.

Gregor Boehl, Gavin Goy, Felix Strobel, 30 August 2020

Despite their pivotal role, the macroeconomic effects of large-scale asset purchases, known as quantitative easing, remain open to debate. This column provides insights from a structural investigation of the macroeconomic effects of the Federal Reserve’s quantitative easing programme during the global financial crisis. In line with the general consensus, the results suggest that asset purchases substantially eased borrowing conditions and facilitated new investment. The rise in investment led to an increase in the productive capacity which, in turn, lowered firms’ marginal cost. These supply-side effects dominated demand-side effects in determining the response of inflation, leading to a mild disinflationary effect.

Robert McCauley, 26 August 2020

On 23 March 2020, the Federal Reserve announced that it would buy investment grade corporate bonds, and on 9 April set the amount at up to $250 billion and extended the purchase to junk bonds. This column shows that these interventions succeeded in stabilising credit markets: prices lifted and dealing spreads narrowed. However, emergency lending powers provide an inadequate basis for Federal Reserve operations in corporate bonds. In light of these findings, congressional authority to buy and to sell corporate bonds alongside US Treasuries would help to align Federal Reserve operations with what has become a capital-market centred financial system

Charles Goodhart, Tatjana Schulze, Dimitri Tsomocos, 04 August 2020

A decade of near-zero, and even negative, interest rates in advanced economies has both encouraged the continued accumulation of debt and a search for yield in riskier assets, while at the same time eroding bank profitability in the retail business. This column discusses some of the palliative measures that central banks have taken to offset the erosion of bank profitability, and raises the question of whether, and how, the longer-term implications of the excessive accretion of debt will be handled.

Maritta Paloviita, Markus Haavio, Pirkka Jalasjoki, Juha Kilponen, Ilona Vänni, 28 July 2020

The introductory statements made by the ECB are some of the most important sources of insight into the central banks’ policy goals. This column presents a textual analysis which seeks to measure the tone of the statements, with the aim of estimating the Governing Council's ‘loss function’. The results suggest that the ECB has been either more averse to inflation above the 2% ceiling, or that the de facto inflation target has been considerably below this threshold. The results also suggest that an inflation aim of 2%, combined with asymmetry, is a plausible specification of the ECB's wider preferences.

Alex Cukierman, 27 July 2020

The use of helicopter money as a monetary policy response to Covid-19 has drawn significant attention over recent months. This column offers a comparison of helicopter money and quantitative easing, as used in the wake of the global financial crisis. By evaluating the similarities and differences, as well as the contrasting contexts of each crisis, key advantages and disadvantages are identified. It concludes that the two policy mechanisms may not be as different as first thought, and helicopter money could well be crucial in combating the economic effects of COVID-19. 

Jean-Paul L'Huillier, Raphael Schoenle, 20 July 2020

Interest rates have remained close to zero in many economies since the Great Recession. This column explores the policy of raising the inflation target in order to generate greater macroeconomic ‘room’. Central banks face constraints when trying to achieve this extra room. The rationale is that by raising the inflation target, the private sector responds by increasing price flexibility. This lowers the potency of monetary policy and thereby endogenously removes part of the room generated by the higher target.

Charles Goodhart, 13 June 2020

The correlation between monetary growth and inflation has an historic pedigree as long as your arm. This column argues that rejecting the likelihood of (eventually) rising velocity following the current massive monetary expansion requires an alternative theory of inflation that has successfully eluded all of us thus far. Ignoring the potential inflationary dangers is the equivalent to an ostrich putting its head in the sand, and while the path towards disinflation may be well known, it simply isn’t available today.



CEPR Policy Research