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The Limits of Extreme COVID Monetary Policy

Summary:
Just because the major central banks can continue to introduce increasingly unconventional measures doesn't mean that they should. The current economic crisis demands primarily a fiscal-policy response, whereas extreme monetary policies carry high risks and produce adverse side effects. LONDON – With output having collapsed as a result of the COVID-19 pandemic, many are wondering how far monetary policy can be stretched to support the economy. For the US Federal Reserve, negative interest rates appear to represent an effective limit, not because such a policy is technically unfeasible, but because it would be politically unacceptable. Yet for the European Central Bank, the Bank of England, and the Bank of Japan,

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Just because the major central banks can continue to introduce increasingly unconventional measures doesn't mean that they should. The current economic crisis demands primarily a fiscal-policy response, whereas extreme monetary policies carry high risks and produce adverse side effects.

LONDON – With output having collapsed as a result of the COVID-19 pandemic, many are wondering how far monetary policy can be stretched to support the economy. For the US Federal Reserve, negative interest rates appear to represent an effective limit, not because such a policy is technically unfeasible, but because it would be politically unacceptable. Yet for the European Central Bank, the Bank of England, and the Bank of Japan, there appears to be no limit.

The ECB has long since cut rates into negative territory, and BOE Governor Andrew Bailey is reportedly “looking very carefully” at that option for the United Kingdom. Likewise, BOJ Governor Haruhiko Kuroda, while deeming the BOJ’s current policy mix appropriate for current conditions, has not ruled out further monetary easing or another...

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