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Pandemic and the Monetary Policy in the Global North
During the COVID-19 pandemic, expansionary economic policies played an important role in reviving the floundering global economy. In this context, the present paper looks at the effectiveness of monetary policy in the global North in stimulating real economic activity. In an ultra-low interest rate regime, the traditional monetary policy ceases to be effective. Therefore, many developed country central banks adopted a slew of unconventional monetary policy tools to tackle the recession. This paper analyses the unconventional monetary policy tools pursued by the global North with special reference to the United States and argues that the transmission channels of unconventional monetary policy tools to increase effective demand are not always automatic and straightforward. There is strong evidence that while these expansionary measures may have helped during the initial crisis, their effectiveness in reviving sustained economic activity in the medium run is doubtful. On the other hand, there are routes through which increased liquidity created by unconventional monetary policy tools has ended up in the financial sector, thereby leading to an asset price inflation that may not have a net beneficial impact on the real economy.
The authors are indebted to an anonymous referee for comments. The views expressed in the paper are personal.
During the COVID-19 pandemic, expansionary economic policies played an important role in reviving the floundering global economy. In this context, the present paper looks at the effectiveness of monetary policy in the global North in stimulating real economic activity. In an ultra-low interest rate regime, the traditional monetary policy ceases to be effective. Therefore, many developed country central banks adopted a slew of unconventional monetary policy tools to tackle the recession. This paper analyses the unconventional monetary policy tools pursued by the global North with special reference to the United States and argues that the transmission channels of unconventional monetary policy tools to increase effective demand are not always automatic and straightforward. There is strong evidence that while these expansionary measures may have helped during the initial crisis, their effectiveness in reviving sustained economic activity in the medium run is doubtful. On the other hand, there are routes through which increased liquidity created by unconventional monetary policy tools has ended up in the financial sector, thereby leading to an asset price inflation that may not have a net beneficial impact on the real economy.
The once-in-a-century-type COVID-19 pandemic has tested and exposed the fault lines of human activity and public policies worldwide. As per the Johns Hopkins Coronavirus Resource Center, the total number of COVID-19 cases was close to 500 million, with total deaths exceeding six million as of end-March 2022.1 Another defining feature of the COVID-19 pandemic has been its deadly spread, from the rich to the poor, spanning North Atlantic and Europe to Asia, Africa, and Latin America—all geographies were affected. A significant silver line has been that the number of vaccine doses administered exceeded 10.9 billion, which perhaps explains the lower incidence of fatality in recent times. Faced with this multi-phased global crisis, national authorities around the world adopted swift policy measures with an attitude of “whatever it takes to rescue people and the economy.” Generically, such measures can be divided into four heads: (i) healthcare-related (for example, vaccination, social distancing norms, and/or lockdowns); (ii) structural; (iii) fiscal; and (iv) monetary.
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