Beyond COvid: The Digest

Monetary policy and the role of central banks

June 15, 2020
  • The focus this week is on monetary financing - when the central bank uses its power to create money to finance government spending - following our latest webinar on the role central banks can play in the recovery from Covid-19.
  • We take a look at reports on state holding corporations, aviation and tax reform in our In Brief section.
  • Our Reflections section brings together articles on economic democracy, the relationship between racism and capitalism, and the historical role of slavery in defining our ideas of justice and human rights.

Focus: monetary policy and the role of central banks

  • The OECD has forecast that the UK will be the worst-hit of any advanced economy by the coronavirus pandemic. It noted that lockdown measures were applied “later than in neighbouring countries”, but also praised the “prompt” and “substantial” fiscal and monetary measures enacted as the lockdown was imposed.
  • ~~The Bank of England cut its base rate to 0.01%, an all-time low, in mid-March, and expanded its bond-purchasing quantitative easing (QE) programme by £200bn. It also extended the the “Ways and Means Facility” - the government’s equivalent of an overdraft facility - which can be used in the event that the government had difficulty financing its expenditure.
  • ~~“Monetary financing” is when the power of the central bank to create money is used to pay for government spending. It has been argued that the Ways and Means Facility is a form of monetary financing, like (potentially) Quantitative Easing. Former head of the Financial Services Authority, Adair Turner, is among those who have argued for the use of monetary financing to pay for government spending in this crisis.
  • Current and former central bankers from major economies, including the Bank of England’s Andrew Bailey, have called for the opportunity of the recovery to be used to “meet the climate challenge”, with government intervention and reforms to the financial system needed to promote clean investment.
  • ~~Campaigners and civil society organisations more generally have made the case for central bank interventions to focus directly on getting funding to green investments, as in the various proposals for “Green Quantitative Easing” (Green QE).
  • ~~This would see QE used as monetary financing and extended beyond the coronavirus pandemic to address the environmental crisis, with central bank money created in the QE process used to buy long-term bonds in green investments - perhaps using an investment bank, like the European Investment Bank, as the intermediary.
  • Green forward guidance” has also been proposed, in which central banks would signal their future intentions to direct investment towards sustainability.
  • ~~The case for central banks to provide active “credit guidance” has become increasingly prominent. Although never wholly abandoned, the policy of allowing central banks to vary interest rates and other restrictions on borrowing to match wider government programmes fell out of favour in the decades before the 2008 crash. Frank van Lerven makes the case for fiscal and monetary policy co-ordination here.
  • ~~In a recent publication, the Bank of International Settlement (BIS) argues that governments (rather than central banks) should take the lead in establishing the conditions to promote green investment, including the incorporation of estimates of climate risk in regulatory frameworks for financial institutions, and more conventional government policy like taxes and subsidies. Elsewhere, BIS have expressed scepticism about the capacity of central banks to intervene for environmental ends.

Adair Turner, former chair of the Financial Services Authority, and economists Frances Coppolla and Frank van Lerven discussed debt and monetary financing in the third webinar of our Beyond Covid Discussion Series. Watch it here.

In brief

  • Project Birch”, the government’s plans to take equity stakes in troubled companies, has raised the prospect of state holding corporations being established to manage these stakes. Laurie Macfarlane and Simone Gasperin, in a new working paper for UCL’s Institute for Innovation in Public Purpose, look at the chequered history of state holding companies in the UK and Italy. They conclude that the objectives applied, and effective monitoring and management, are decisive in making a success of such ventures.
  • The New Economics Foundation have estimated that one of the industries worst-affected by the pandemic, aviation, could lose 70,000 jobs in the UK alone - a figure the authors of its new report compare to the loss of mining jobs in the early 1980s. They call for a new “sector panel” to oversee any rescue package, with representation from businesses, governments, and unions, the creation of a “right to retrain” for workers affected, and for the government to take equity stakes in companies receiving bailout funding.
  • A coalition of charities, think tanks and NGOs, including Oxfam UK and Christian Aid, has called for radical reform of the tax system, in preparation for a fairer post-Covid world. Demands include no bailouts for those seeking to avoid tax and proper and fair taxation of wealth.
  • Last week, the unemployment rate in the USA appeared to fall from its earlier peaks. But this conclusion has been undermined by a closer analysis of the figures, suggesting a significant misidentification of those not working. Economists Jason Furman and Wilson Powell have estimated that 4.9m people have been incorrectly recorded as employed. Including them raises the unemployment rate from 13.3 to 17.1%, down slightly on April’s total but still the second highest monthly level for 70 years.
  • A new report from the RSA, “Blueprint for good work” includes recommendations on workplace democracy and establishing data trusts, based on the five principles of “security, freedom, growth, wellbeing and subjective nurture”.
  • Compass have a new pamphlet out, making a clear, simple case against austerity.
  • Bloomberg Green have a comprehensive guide on “How to Grow Green, based on emerging practice from around the world as economies lay out green recovery plans.


  • Felix Fitzroy and David Spencer, argue on the LSE blog that economic democracy is critical to ensuring a recovery programme will address major structural issues, based on their earlier paper.
  • International Trade Union Confederation general secretary Sharran Burrow writes on global recovery plans, and the need to put workers at the centre of a climate-based recovery.
  • Empire-builder Robert Clive, “Clive of India”, whose statue today sits symbolically between the Foreign Office and the Treasury, is the subject of this damning indictment of his war crimes and plunder by historian William Dalrymple.
  • In the New Yorker, Nicholas Lehman looks at recent historical debates on the emergence and development of capitalism and asks, “Is capitalism racist?
  • And Walter Johnson considers the historical role of slavery in defining our ideas of justice and human rights today in the Boston Review.

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