Central Banks (CBs) are by nature more flexible than governments. Thus, they have been the most proactive in this crisis, reintroducing large-scale asset-purchase programmes financed by money creation (QE policies). With this pandemic, a spectacular change in economic policy has taken place in just a few months: fiscal and monetary policies have become intertwined, and this is probably not reversible. While governments have become the buyers of last resort, CBs are playing their role as lenders of last resort. How far can they go? We argue here that CBs are still far from being out of ammunition. Financial repression and fiscal dominance are here to stay. CBs will maintain low bond yields for an extended period of time to alleviate the burden on the most leveraged agents.
The structural weakness of nominal and real interest rates should lead investors to continue to ‘hunt for yield’; in particular, this environment should encourage households to diversify their savings away from government bonds. Ultimately, we cannot rule out the emergence of new bubbles, the bursting of which could jeopardise macrofinancial stability. Regulation and taxation may have to be mobilised to contain asset-price inflation, particularly with regard to property market. Unconventional monetary policies call for more regulation, not less.
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