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The second wave of central bank policy innovation

Summary:
Pierre Ortlieb of OMFIF in this piece: As the Covid-19 pandemic began rippling through financial markets and the global economy earlier this year, central banks quickly unveiled a raft of initiatives aimed primarily at easing short-term liquidity conditions. These policy innovations took place across developed and emerging markets, encompassing new assets purchases, lending facilities and institutional relationships. Many emerging market central banks broke new ground by engaging in large-scale asset purchases. The monetary authorities of Poland, Hungary, Malaysia, Chile and Colombia, among others, established quantitative easing programmes. While relatively small as a share of GDP compared to the asset purchases of developed economy central banks, these programmes are of

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Pierre Ortlieb of OMFIF in this piece:

As the Covid-19 pandemic began rippling through financial markets and the global economy earlier this year, central banks quickly unveiled a raft of initiatives aimed primarily at easing short-term liquidity conditions. These policy innovations took place across developed and emerging markets, encompassing new assets purchases, lending facilities and institutional relationships.

Many emerging market central banks broke new ground by engaging in large-scale asset purchases. The monetary authorities of Poland, Hungary, Malaysia, Chile and Colombia, among others, established quantitative easing programmes. While relatively small as a share of GDP compared to the asset purchases of developed economy central banks, these programmes are of unprecedented size for many countries.

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The further spread of so-called funding for lending programmes is another example underscoring how eager central banks are to expand their toolkits in the interest of the long-term pandemic recovery. The Bank of England introduced a term funding scheme for small- and medium-sized enterprises in March, offering tranches of low-cost funding for lenders depending on the volume of their real economy lending.

These have since been introduced in Australia, Taiwan, and several other jurisdictions, most recently New Zealand. The Reserve Bank of New Zealand scheme is more directly targeted at households, with the initial tranche of funding capped at 4% of banks’ ‘total loans and advances to New Zealand households, private non-financial businesses, and non-profit institutions serving households’ at the central bank’s official cash rate. The diffusion of alternative monetary policy instruments to bolster SMEs at this stage in the pandemic underscores the willingness of central banks to keep experimenting and adding to their toolkits.

Central banks have shown a continued willingness to reinvent their monetary policy toolkits, both in the interest of small-scale market functioning and of broader, more substantial economic policy issues.

Not sure whether critiques would term these innovations..

Amol Agrawal
I am currently pursuing my PhD in economics. I have work-ex of nearly 10 years with most of those years spent figuring economic research in Mumbai’s financial sector.

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