Central banks at their limits - Capital Economics

With interest rates at very low levels in most developed economies, there are widespread concerns that central banks have little ammunition left to support their economies through the current virus-related disruption.

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In fact, there are still many options, from changes to central banks’ policy frameworks to so-called “helicopter drops”. 

The main constraint on monetary policy will instead be unease about the adverse side-effects of the long-term use of such unorthodox policies – for example, increasing inequality, causing asset price bubbles or creating problems in parts of the financial sector. Central banks might also be reluctant to blur further the line between monetary and fiscal policy.

This all means that the onus will be on fiscal policy to do the heavy lifting in any future downturn, which will require overcoming any unease about pushing government debt even higher.

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