Politics and Policy

Unconventional policy in the next downturn

A lack of policy space means that central banks may have to turn to more unconventional responses when the next recession occurs.

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Unconventional policy in the next downturn

Perhaps the most profound feedback of policy onto markets comes through the actions of central banks. In the short term, markets have an unhealthy obsession with parsing every word and phrase of central bankers for clues to their immediate policy intentions. However, from a long-term perspective, the most important questions relate to the scale and nature of the policy response to the next economic downturn.

The lessons of the last 50 years of policy responses are sobering. It is highly unlikely that anything like the amount of conventional policy space utilised will be available in the next downturn. We therefore need to consider the scope of what is possible and examine the largely unconventional potential policy choices, such as augmented quantitative easing and ‘helicopter money’.

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