The View | Why central banks must handle the shift to a post-coronavirus pandemic normal with extreme care
- Advanced economies must at some point begin to wind down their massive monetary and fiscal policy support to sustain recovery
- Yet market corrections, business failures and economic contagion arising from a shadow banking or debt crisis could all torpedo the fragile recovery
Over the past year, rich-country governments and central banks have provided unprecedented fiscal and monetary stimulus to help mitigate the economic impact of the Covid-19 pandemic.
Getting back to economic normality – whatever modified form that takes in 2021 and 2022 – will require advanced economies to start weaning themselves off official support before too long, and thereby avoid dangerous new complications.
On the monetary-policy front, central banks around the world did whatever was necessary to calm financial markets when the pandemic struck in the spring of 2020. They have since maintained a highly supportive stance, with historically low and in some cases negative real policy rates. Monetary policymakers reused and enlarged existing tools, and fashioned new ones as needed.
These crucial efforts have greatly inflated major central banks’ balance sheets. In December 2020, the combined assets of the US Federal Reserve, the European Central Bank, the Bank of Japan, and the People’s Bank of China stood at a staggering US$28.6 trillion.
The ECB accounted for US$8.5 trillion of this total, and the Fed US$7.3 trillion, while the BOJ and the PBOC had total assets of US$6.8 trillion and US$5.9 trillion, respectively.
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Likewise, advanced-economy governments have pursued historically aggressive fiscal policies, casting aside spending restraints to provide broad and largely indiscriminate support to many who needed and deserved it.
