Position Paper November 2021
Money in Covid Times
A primer on central bank response measures to COVID-19
Is central bank policy orthodoxy a thing of the past? If so, what are the new limits? If not, what is the path to normalization? This report helps frame those key policy considerations.
Money in Covid TimesRead the full article (PDF)
This paper, “Money in COVID Times,” is an analysis of how the role of central banks in the market and the economy has changed since 2008. From this perspective, the COVID-19 situation has only exacerbated the transformation of central banks into entities that act as lender and market maker of last resort, every time markets experience a level of stress that could reverberate across money markets, including credit and financial assets used as collateral.
Together, the various stratums of money markets have replaced traditional banks as a supply chain for capital markets activity. These questions are important for investment professionals and CFA® charterholders because of the impact monetary policy is now having on the market economy, the availability or scarcity of financial assets, and the natural price formation mechanism.
CFA Institute recently released the results of research focused on the effects of the COVID-19 crisis for capital markets and the investment industry.1 This research was based on a survey of the CFA Institute global membership, constituted in large part of industry professionals whose expertise we sought to gauge more precisely how markets have reacted to the crisis and the authorities’ response.
A significant portion of this research concentrated on the unprecedented nature and scale of the monetary stimulus enacted by central banks as a response to the market shock wave caused by the economic lockdown measures, which had been enacted by governments around the world to face the health crisis. Our research shows that market professionals, in general, and CFA Institute members, in particular, are divided on the new prominent role that central banks have assumed in the economy since the 2008 global financial crisis.
Several themes have emerged:
- At which point should central banks consider that the time is right to normalise monetary policy in line with the economic cycle?
- Should monetary policy and fiscal policy be coordinated?
- How important is central bank independence?
- Is there an objective limit to the extent of monetary stimulus?
In this report, we explain why central banks (as an aggregate) intervened in the manner that they did both in 2008 and 2020, which subsequently will further understanding of the increasingly central role they play in the markets in which CFA charterholders work.
Specifically, we will outline the following:
- The worldview of money as a form of hierarchical credit
- The importance of market-based finance in ensuring credit flow
- The key markets in market-based finance
- The theory and practice behind central bank interventions in these markets
- The way in which COVID-19 was an illustration of this worldview in action These topics are of key importance for CFA charterholders to understand now that central banks will be intervening in markets for the foreseeable future.
About the Author(s)
Olivier Fines, CFA, is head of advocacy and capital markets policy research for the Europe, Middle East, and Africa (EMEA) region at CFA Institute. With teams based in London and Brussels, he leads the effort in researching and commenting on the major trends that affect the investment management industry, changes to the profession, and policy and regulatory developments. The positions taken on these issues and the research pieces that are published are meant to promote the fundamental principles upheld by CFA Institute: investor protection, professional ethics, and market integrity. Previously, Mr. Fines spent 15 years in investment management—spanning research, portfolio management, product management, and regulatory compliance work—at firms based in Paris and London. Prior to joining CFA Institute, he was head of risk and compliance at Rothschild & Co for the private equity and private debt division.
Sviatoslav Rosov, PhD, CFA, is director, capital markets policy, EMEA, at CFA Institute. He is responsible for developing research projects, policy papers, articles, and regulatory consultations that advance CFA Institute policy positions, focusing on market structure and wider financial market integrity issues.
Simon Johnson is the Ronald A. Kurtz (1954) Professor of Entrepreneurship at the MIT Sloan School of Management. He is also a senior fellow at the Peterson Institute for International Economics in Washington, DC, a co-founder of BaselineScenario.com, a member of the Congressional Budget Office Panel of Economic Advisers, and contributing editor of The Huffington Post. In addition, he is a co-director of the NBER Africa Project and works with nonprofits and think tanks around the world. Previously, Professor Johnson was the International Monetary Fund's Economic Counsellor and director of its Research Department. He is a weekly contributor to the NYT.com Economix blog, publishes a monthly column with the global Project Syndicate, and has published high-impact opinion pieces in The Atlantic, The New Republic, BusinessWeek, Bloomberg, The Financial Times, and other publications. Professor Johnson is the co-author, with James Kwak, of 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown, an assessment of the dangers now posed by the U.S. financial sector. Professor Johnson received a BA from the University of Oxford, an MA from the University of Manchester, and a PhD in economics from MIT.