COMMENTARY: MONETARY POLICY IN TROUBLED TIMES

Abstract

The Commentary in this Review has touched on the mix of monetary and fiscal policies regularly since the Brexit referendum 1 The timeless issues relating to the framework for monetary and fiscal policy and their appropriate degree of co-ordination have been exposed by the Covid-19 crisis We have previously argued that the sequence of arbitrary fiscal rules that have been formulated by successive governments in the past decade do not make much economic sense as they do not match a well-defined social welfare criterion 2 We have also argued that the framework for monetary policy needs a close examination after the experiences of the global financial crisis and nearly 23 years of operational independence of the Bank of England 3 The economy is now engulfed in a crisis almost without parallel in peacetime, and we can anticipate a fall in activity in the region of 15–25 per cent in the initial period of lockdowns We are on the cusp of what may prove to be the first of several severe contractions in output as the authorities are forced to shut down society to limit the death toll from the Covid-19 strain of the coronavirus Should the duration of lockdowns get longer, the impact on the economy and the scarring they will leave will increase The case for fiscal response and extensive monetary support is clear