Wartime monetary policy: Monetary policy options to adopt during war

Abstract

Wars occur frequently in the world today. Wars cause economic distortions, and they lead to adverse human, economic and social consequences. Monetary policy actions can be used to cushion the adverse effect of war on the economy. Monetary authorities can respond to war by developing wartime monetary policy frameworks to control inflation and to support the war economy throughout the war. This article explores some monetary policy options that central banks can adopt during war. They include increase interest rate at the start of the war to control inflation expectations, hold interest rate at the same level when there is high uncertainty around war, decrease interest rate when war is battering the economy on multiple fronts, decrease cash reserve requirements on bank deposits during war as was observed in Russia, keep liquidity ratio fixed or increase it during war as was seen in Ukraine, the sale of government securities during war should be considered as well as and the unpopular and least advisable option of printing money to increase money supply during war. The recommended wartime monetary policy options in the study are useful to economists, central banks and governments who are facing war in their countries.