Pandemic economics: the role of central banks and monetary policy

Below are the slides from my presentation at Beyond Covid on 12th June. The whole webinar can ve viewed here.

The pandemic seems to me to resemble the "nuclear disaster" scenarios of my youth: hide in the bunker, then creep out when the immediate danger is over, only to find a world that is still dangerous and has fundamentally changed in unforeseeable ways. 

Rabbits hiding from a hawk is perhaps a kinder image, though hawks don't usually leave devastation in their wake. And I like rabbits. So this presentation is illustrated with rabbits, not nuclear bombs. 

This is where we were in March/April/May. Hiding in our homes, waiting for the danger to pass:

And this is what central banks should have been doing then:

To their credit, this is exactly what they did. By supporting sovereign finances and warding off a financial crisis, they enabled fiscal authorities to take the extraordinary measures needed to keep people and businesses alive in their burrows. 

Some economists mistakenly called for central banks to do demand stimulus such as helicopter money. But it was completely the wrong time for this. Why dangle carrots in front of the burrows to entice the bunnies out while the hawk is still flying overhead? Fortunately, central banks ignored them. 

This is where we are now:

Even if all restrictions were lifted tomorrow, demand recovery would be slow because people have suffered a severe knock to their confidence. Indeed, suddenly lifting all restrictions could send the bunnies scurrying back into their burrows. The world has become a dangerous place. 

So what should central banks be doing right now? More of the same, really:

While restrictions remain in place and confidence is severely dented, it is too early for major stimulus of household demand. However, central banks could at this point do limited stimulus aimed at businesses rather than households, such as conventional QE and encouraging bank lending to SMEs.

What does the future look like? Well, it won't be the same as before:

The economy will need a lot of support for a long period of time. How can central banks help to provide this support?

The implication of all this is that central banks need to rethink their mandates and their relationship with fiscal authorities:

The era of dominant central banks is over. Central banks' primary role is to support governments so that they can do "whatever it takes" to maintain jobs, incomes and prosperity. 

The responsibility of the major central banks, especially the Fed, extends to the governments of developing nations. FX crises in developing countries have a habit of coming back to bite advanced nations. And the humanitarian cost of failing to support countries with high FX debt through these exceptional times is far too high to bear. 

Related reading:


  1. Problems: we still don’t know the long term changes. Will tourism disappear, bringing down hotels, airlines and then airlines manufacturing? Will real estate disappear as white-collar WFH forever?
    I saw a lot of especially libertarian comment (Arnold Kling, Tyler Cowen, Steve Hanke) arguing that everything will become online and especially schools will disappear along with teachers and unions ( libertarians seems to still have problems with Miss Nancy telling them they have to go to the bathroom instead of using their right to do as please)
    The Spanish flu inflicted far more casualties on the developed world.
    Using the new technology of on-line learning known as « books » , schools disappeared. The catalogues and post office delivery closed all stores. Recorded music ended live concert venues. Color printing made travelling to visit National Parks irrelevant...
    And yet nothing changed.
    In fact, we got out of the bunker for large political rallies because we may be fearful but we are primarily a political animal.

  2. You raised a very important topic for today. This is my first time here, amazing presentation. I really liked the format of your blog. Thanks!


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