The size of the recession caused by Covid-19 is changing the way economists and policy-makers think about economic policy. The first few months of 2020 saw many economic policy boundaries being breached. In the space of a few months, the Federal Reserve, which is responsible for US monetary policy, almost doubled the value of its balance sheet assets, from about $4 trillion to $7.5 trillion, through a record issuing of trillions of dollars and, for the first time, direct lending to the private sector through the Main Street Lending Program. Before the pandemic, the Fed lent only to the banking system. In the UK, the Bank of England opened up a direct credit line to the UK Treasury, disregarding concerns over monetary financing of the government budget, actions historically perceived as very risky for central bank independence and, therefore, for the control of inflation.

These are just two examples that form part of a more general trend, in which the unprecedented economic crisis brought about by the pandemic has resulted in central banks intervening assertively with seeming little concern about whether their actions were risking financial soundness and might affect their ability to control inflation. In other words, these actions would seem to threaten the central banks’ independence and even their very existence. The interventions have been enabled by continued low levels of inflation that have persisted over many years, and which have been exacerbated further by the pandemic.

The ability of central banks to act forcefully – a luxury not afforded to central banks in many emerging economies – has emboldened those who support the idea that central bank printing presses should run to finance government spending, as the supporters of modern monetary theory and certain politicians have claimed. Recently, many governments have benefited from the exceptional support offered by their central bank in the purchase of trillions of government bonds, enabling them to offer unprecedented fiscal support to the economy. It is estimated that the US budget deficit in 2020 will be the highest in its post-war history at close to 15 per cent of GDP. Australia, Germany, Japan and other countries are predicted to reach similar deficit levels.