Research needed into central banks’ pandemic response

Buckle, speaking to the New Zealand Economists Association annual conference, said the pandemic posed unprecedented challenges for governments and central banks, and assessments are needed for accountability and insights to guide future policy

A review of the Australian Government’s policy responses, suggests the defining characteristic of the pandemic is “huge and ongoing uncertainty”.

There was uncertainty over the epidemiological features of the virus, its impact on peoples’ health, how society would respond to government health mandates, the frequency and duration of those mandates, how the financial system would react, and the effectiveness of unique fiscal measures introduced to buttress economies. “Initial forecasts for economies were dire,” Buckle said.

In Australia and around the world, central banks have been widely criticised for their responses to the pandemic and while there have been some attempts to evaluate their decisions, they have been partial only, he said.

“It is not sufficient to assess monetary policy decisions solely on the basis of how policy interest rates compare with estimates of “neutral” policy rates as some critics have done.

“Nor is it sufficient to simply identify demand- and supply-induced contributions to inflation to assess the impact of monetary and fiscal policy.”

Buckle said a robust assessment would account for central bank mandates, the trade-offs required to sustain price stability over the short and medium terms, the information available at the time decisions were made (including knowledge of the scope and effects of government fiscal and health responses), and the efficacy of the policy responses.

“The perception of the performance of central banks during this period will have a bearing on the tolerance for central bank independence.

“If central banks are to retain public confidence in their independent status, it is important they respond to criticism and promote research that identifies behavioural responses to monetary policy during the pandemic,” he said.

This work should evaluate the design and scope of policy initiatives including the size of policy rate cuts, the duration and specification of forward guidance, the design and scope of quantitative easing and other measures introduced to support the funding and liquidity of financial institutions, and the timing of policy reversals.

“Insights from this research can help central banks adapt their decision processes to be better prepared for future events that threaten inflation and macroeconomic stability.”

This is particularly so for complex events, like the pandemic, that impact the supply-side of economies (production and labour markets), he said.

Some central banks have started the process and acknowledged mistakes in timing, magnitude and duration of their policy responses during the pandemic.