Monetary Policy and COVID-19: Are We Out of the Woods Yet?

Abstract

The Corona virus has caused a synchronised cyclical slowdown, with disrupted supply chains and falling revenues causing a retrenchment in economic activity. In an attempt to quell the most negative effects of the virus, central banks have lowered policy rates to varying degrees, absent the ECB, with asset purchases designed to bolster liquidity in financial markets and reduce the costs of bankruptcy. This paper finds heterogeneity in central bank’s COVID-19 response, with the provisions of liquidity for businesses, asset purchases and credit-specific COVID-19 programmes implemented across a majority of advanced economies. As the virus intensified, central banks have prioritised economic growth and an ample supply liquidity in financial markets over inflation outcomes. This paper finds that such measures will support the medium-term outlook, cause a signify ant increase in central bank’s balance sheet and avert a protracted financial and economic crisis.