With interest rates still very low in many developed economies, there are widespread concerns that central banks have little ammunition left with which to fight another downturn.
In fact, there are still many options, from changes to central banks’ policy frameworks to so-called “helicopter drops”. Indeed, we expect more easing from central banks, including an expansion in 2020 in the ECB’s corporate bond purchase programme.
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.