The economic and financial carnage wrought by the pandemic could leave deep scars on the world economy. Central banks have stepped up to the challenge by tearing up their own rulebooks. The U.S. Federal Reserve has bolstered financial markets with asset purchases and provided dollar liquidity to other central banks. The European Central Bank has declared “no limits” to its support of the euro and announced massive purchases of government and corporate bonds, and other assets. The Bank of England is financing government spending directly. Even some emerging-market central banks, such as the Reserve Bank of India, are considering extraordinary measures—all risks be damned.
Fiscal stimulus by governments, on the other hand, has proved to be politically complicated, cumbersome to implement, and often difficult to target where the need is greatest.
Central bankers, once considered cautious and conservative, have shown they can act with agility, boldness, and creativity in desperate times. Even when political leaders are unwilling to coordinate policies across borders, central bankers can act in concert.
Now and for a long time to come, central banks have become entrenched as the first and main line of defense against economic and financial crises. They may come to rue this immense new role and the unrealistic burdens and expectations it will impose on them.