Speech
Monetary policy during the pandemic: the role
of the PEPP
Speech by Philip R. Lane, Member of the Executive Board of the
ECB, at the International Macroeconomics Chair Banque de France -
Paris School of Economics
Paris, 31 March 2022
Introduction
It is a pleasure to speak to you here today. While delivering this lecture in person rather than online is a
reflection of the declining public health impact of the pandemic (the current high infection rate
notwithstanding), the step-by-step transition to the new normal is currently being overshadowed by the
Russian invasion of Ukraine. This war not only confronts us with the immediate implications of a war in
Europe, but also constitutes a tectonic shock to the global geopolitical and economic order. Above all,
the Governing Council of the ECB expresses its full support to the people of Ukraine. We will ensure
smooth liquidity conditions and implement the sanctions decided by the European Union and European
governments. We will take whatever action is needed to fulfil the ECB's mandate to pursue price
stability and to safeguard financial stability.
Turning now to the main focus of this lecture, this is a milestone week: the end of March marks the
conclusion of ECB net asset purchases under the pandemic emergency purchase programme (PEPP).
This is a good moment to review the conduct of monetary policy during the pandemic, with a primary
focus on the PEPP. In addition to this review, I will also discuss the current challenges for monetary
1 ]
policy.[
The monetary policy response to the pandemic
From the outset, the pandemic posed three challenges for the ECB: first, stabilising financial markets;
second, protecting credit supply; and third, countering the adverse impact of the pandemic on the
projected inflation path. Tackling the first pair of challenges was necessary to achieve the inflation
target, since market instability or a credit crunch would have made it impossible to run an effective
monetary policy.
In relation to the adverse impact on the projected inflation path, the June 2020 Eurosystem staff
projections marked down the end-of-horizon annual inflation rate for 2022 from 1.6 per cent to 1.3
percent, while the end-of-horizon inflation rate was modelled to decline even further to 0.9 per cent in a
severe pandemic scenario. These large-scale inflation downgrades reflected the projected increase in
economic slack due to the substantial declines in GDP that were feared.
From a stance perspective, an insufficient monetary policy response would have implied a longer
period of low inflation, putting at risk the timely convergence of inflation to the target rate (now defined
as two per cent). Excessively-low inflation would have implied higher real interest rates, thereby
weakening the recovery of investment and consumption. Moreover, especially in the context of the
effective lower bound on policy rates, a protracted period of low inflation might have fostered a
downward drift in inflation expectations that could ultimately become entrenched, making it even more
difficult for us to deliver our inflation aim. This concern was subsequently codified in the 2021 monetary
policy strategy statement that concluded that the delivery of the symmetric two per cent inflation target
requires - when the economy is in the proximity of the lower bound - especially forceful or persistent
monetary policy measures to avoid negative deviations from the inflation target becoming entrenched.
Monetary policy was already accommodative before the pandemic shock. The prospect of persistent
below-target inflation had resulted in a further easing of the monetary stance in September 2019: the
deposit facility rate had been lowered to minus 0.5 per cent and net asset purchases were resumed at
a rate of €20 billion per month under the ECB's baseline asset purchase programme (APP). These
measures were reinforced by forward guidance that tied future monetary policy decisions to the inflation
outlook and developments in underlying inflation dynamics. In addition, credit supply was supported by
the third series of targeted longer-term refinancing operations (the TLTRO III programme).
In its initial response to the pandemic crisis in spring 2020, the ECB adopted a comprehensive package
of complementary measures. The central elements included: the escalation of asset purchases through
the 12 March 2020 decision to add an extra € 120 billion to the already-running APP and the 18 March
2020 launch of the pandemic emergency purchase programme (PEPP), a revision in the structure and
pricing of the TLTRO programme, an easing of the collateral framework, and a set of supportive
supervisory measures (taken by the supervisory wing of the ECB).
In combination with the forceful fiscal responses at national and EU level - also complemented by the
responses of macroprudential and supervisory authorities - these measures have been successful in
stabilising financial markets and protecting credit supply. In addition to its market stabilisation role, the
additional quantitative easing provided by the PEPP and the extra injection of liquidity through the
expansion of the TLTRO programme also eased the overall monetary stance, helping to counter the
negative impact of the pandemic on the projected inflation path. The combination of asset purchases
and the targeted lending programme led to a substantial expansion of the balance sheet of the
Eurosystem, which was of comparable size to the balance sheet increases of the Federal Reserve and
the Bank of England (Chart 1).
Chart 1
Change in balance sheets of the Eurosystem, the Federal Reserve and the Bank of
England since 2019
(cumulative changes relative to January 2020 in terms of percentages of GDP in Q4 2019)
Sources: ECB, Federal Reserve Bank of New York, Bank of England, Haver Analytics and ECB calculations.
Notes: For the Eurosystem asset purchases include all PEPP and APP purchases. Credit operations include all
TLTROs, PELTROs, MROs, and LTROs. For the Federal Reserve asset purchases include all Treasury bills, notes,
and bonds as well as inflation-protected Treasuries and floating-rate Treasuries. These also include agency bonds
and mortgage-backed securities. Credit operations include all repurchase agreements, loans, and operations
under the Commercial Paper Funding Facility II, the Corporate Credit Facility, the Municipal Liquidity Facility, the
Main Street Lending Programme, and TALF II. For the Bank of England asset purchases include all Gilts and
corporate assets held within the Asset Purchase Facility. Credit operations include all operations within the ILTR,
CTRF, TFS and TFSME. The latest observations are for December 2021.
The pandemic measures should be viewed as acting to reinforce the impact of the already-low levels of
the key policy rates. Moreover, the ECB's forward guidance about the future setting of its policy
measures played a central role in determining the overall monetary stance. In relation to the key policy
2 ]
rates, since September 2019 the forward guidance linked future rate setting to the inflation outlook.[
The Governing Council framed its forward guidance on the path of policy rates in terms of a
commitment to attaining the inflation target by clarifying that policy rates would be lifted only if the
evidence was sufficiently robust to foster a high degree of confidence that the inflation rate would reach
3 ]
two per cent on a durable basis.[ Such state-contingent forward guidance represents a strong
commitment to keep financing conditions at sufficiently accommodative levels for as long as necessary
to stabilise inflation at the medium-term inflation target in a sustainable fashion.
In line with the state-contingent forward guidance, market-based expectations of future policy rates
adjusted in response to changes to the inflation outlook. Chart 2 shows the evolution of the expected
timing of the first increase in our key policy rates since the introduction of the state-contingent forward
guidance on the path of interest rates. In the initial weeks of the pandemic, the lift off date was pushed
from 2022 to 2027, before stabilising around 2025/2026 for most of 2020. Over time, the market view of
the lift-off date has been pulled forward, in response to the changing outlook for inflation. While
timevarying risk premia (possibly also reflecting some uncertainty about the central bank reaction function)
means that the scale of movement in the lift off date might not always conform to the most likely path
for future policy rates, the directional pattern of adjustments broadly reinforced the monetary policy
stance during much of this period.
Chart 2
Market-based lift-off dates
(date of lift-off; date of observation)
Sources: Bloomberg, Refinitiv and ECB calculations.
Notes: The market-based lift-off date is the date during which the €STR forward rate exceeds the current €STR
rate by at least 10 basis points or 25 basis points. The latest observations are for 18 March 2022.
4 ]
As I described in earlier contributions, the PEPP was designed with a dual role.[ First, alongside the
ECB's other monetary policy instruments, asset purchases were the most important mechanism for
delivering the additional monetary accommodation required to support the economic recovery and
safeguard price stability in the medium term. Second, the flexibility embedded in the PEPP - across
time, asset classes and jurisdictions - was essential in enabling the ECB to stabilise financial markets
in an efficient and effective manner.
The forward guidance for PEPP was connected to the pandemic: net PEPP purchases would continue
until the Governing Council judged that the coronavirus crisis phase was over. In December 2020, the
initial calendar guidance that the pandemic crisis phase would last until at least June 2021 was
extended to March 2022. The March 2022 end date was confirmed in December 2021, while the
calendar guidance on the reinvestment horizon was revised until at least the end of 2024. In any case,
the future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate
monetary policy stance.
The calibration of the PEPP had to take into account the substantial step up in net issuance of both
public and private securities entailed by the pandemic (Chart 3). In the absence of sufficient asset
purchasing by the ECB, this extraordinary increase in issuance could have put significant upward
pressure on funding costs, putting firms and households under extra financial pressure and running the
risk of an adverse real-financial doom loop by which tighter financing conditions and declining activity
levels reinforce each other.
Taken together, the APP and PEPP portfolios now amount to €5 trillion. Chart 4 shows the evolution of
these holdings for the four largest member countries, expressed in ten-year equivalents. On this
maturity-adjusted basis and expressed as a ratio to the total universe of bonds outstanding, the
Eurosystem's holdings increased from 19 percent to 30 per cent over the period 2020-2021. Chart 5
shows the monthly purchases flows during the pandemic.
While the ex ante flexibility to deviate from the capital key was an essential feature of the PEPP, the ex
post deviations from the capital key were relatively limited and also self-corrected over time (Chart 6).
In particular, capital key deviations peaked in the early weeks of the PEPP, while subsequent
purchasing was generally aligned with the capital key, in view of the rapid stabilisation of spreads in the
wake of the PEPP announcement.
Chart 3
Annual net issuance of public and private sector securities
(EUR billion)
Sources: ECB and EBA.
Notes: The dotted line shows ECB staff projections of debt issuance of securities issued by the public sector and
the non-financial corporate sector and projections of the European Banking Authority (EBA) for (unsecured)
securities issued by the banking sector. The latest observation is for 18 March 2022.
Chart 4
The stock of the APP and the PEPP portfolios
(left side: EUR billions; right side: percentage)
Source: ECB and ECB calculations.
Notes: PEPP and APP government bond holdings (including national government bonds, regional and local
government bonds and other relevant agency bonds; excluding supranational bonds) are shown in ten-year
equivalent terms. The share of the total outstanding universe is both in terms of nominal holdings and ten-year
equivalents. The latest observations are for February 2022.
Chart 5
The monthly flow of net purchases under APP and PEPP
(EUR billion)
Source: ECB.
Notes: Monthly net purchases in book value at month-end. The latest observations are for February 2022.
Chart 6
PEPP portfolio relative to the ECB capital key
(percentage)
Source: ECB.
Notes: The chart plots the cumulative net purchases per country under the PEPP as a share of total cumulative net
purchases of public sector securities under the PEPP (excluding supranational securities) in May 2020 and
January 2022 against the ECB capital key. The latest observations are for January 2022.
The combination of the pre-pandemic and pandemic-specific monetary policy measures successfully
contributed to the stabilisation of markets and thereby helped to ensure the smooth transmission of
monetary policy. Charts 7 and 8 show the evolution of the ten-year risk-free yield (as captured by the
overnight index swap (OIS) rate) and the spread of the GDP-weighted ten-year sovereign yield over the
OIS rate at that tenor. Sovereign yields are central to the transmission of euro area monetary policy,
since sovereign bond yields in each member country are the basis for funding costs for households,
corporates and banks (in addition to governments).
In relation to the risk-free yields, Chart 7 shows a significant lowering of the ten-year risk-free rate over
the course of 2020. Since the short-term risk-free rate is anchored by the deposit facility rate level of
minus 50 basis points and the ten-year rate fell towards those levels, the yield curve was relatively flat
by December 2020, prompting a pivot in the conduct of the PEPP towards an emphasis on maintaining
favourable financing conditions - in particular, preventing a tightening in financing conditions that would
have been inconsistent with countering the downward impact of the pandemic on the projected path of
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inflation.[
Chart 7
10-year OIS rate
(percentages per annum)
Sources: Refinitiv, Bloomberg and ECB calculations.
Note: The latest observation is for 25 March 2022.
While Chart 8 shows that sovereign yields have largely tracked the evolution of the risk-free rate, there
was an initial decoupling in the first weeks of the pandemic. The significant drop in yields upon the
announcement of the PEPP vividly illustrated the importance of central banks in underpinning market
stability in the event of a large adverse shock.
Chart 8
Ten-year euro area GDP-weighted sovereign yield spread over OIS
(percentages per annum)
Sources: Refinitiv, Bloomberg and ECB calculations.
Note: The latest observation is for 25 March 2022.
In a monetary union that lacks an area-wide common safe asset, flight-to-safety episodes have a
geographic dimension, in view of the high substitutability across national financial systems that is
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enabled by the absence of currency risk.[ The nature of such episodes is that heightened risk
aversion not only may involve a reassessment of the pricing of fundamentals-based risks but also may
induce a self-fulfilling withdrawal to so-called safe haven jurisdictions in the belief that other investors
may also opt to make the same geographic reallocation decision.
In the absence of active market stabilisation by the central bank, the intrinsic self-validating nature of
flight-to-safety dynamics creates the risk of asset price movements and cross-border financial flows
that, in terms of their magnitude, are unwarranted by fundamentals, but that also reflect a switch across
multiple self-fulfilling beliefs-driven equilibria.
While it is always challenging to distinguish between fundamentals-driven and beliefs-driven repricing
and reallocation dynamics (especially in real time), the specific circumstances of the pandemic crisis
suggest that there was a compelling case for the central bank to act as a market stabiliser. First, as
outlined above, it was clear that flight-to-safety pressures were operating at a global level, with the risk
of a broad disconnect between asset prices and fundamentals across many markets. Second, the
nature of the shock (a worldwide pandemic) meant that concerns about moral hazard were more
attenuated than in some other scenarios.
The narrowing in sovereign spreads during 2020 was also critically supported by the development of
the Next Generation EU (NGEU) programme. The collective commitment of the EU to underpin
economic recovery across all member countries through common funding and an allocation key that
was not simply proportionate to each country's size led global investors to re-evaluate their beliefs
7 ]
about the resilience of the EU and the euro.[
Chart 9 captures some of the main considerations in calibrating the quarterly pace of purchases under
the PEPP. While there was an indicative initial overall envelope for PEPP, the framework also allowed
for adjustments to overall stock of asset purchasing. In particular, the overall envelope was rescaled
from the initial € 750 billion to € 1,350 billion in June 2020 and € 1,850 billion in December 2020 in line
with re-evaluations of the likely duration of the pandemic, the scale of pressure on the bond market and
size of the pandemic inflation gap. With its emphasis on maintaining favourable financing conditions
(following the flattening of the yield curve in autumn 2020), the December 2020 decision allowed for
two-sided flexibility: relative to the € 1,850 billion envelope, the overall expected stock could be revised
down if financing conditions eased or the projected inflation shortfall declined; in the other direction, the
overall expected stock could be revised up if financing conditions tightened or the projected inflation
shortfall increased. In this way, quarterly adjustments to the pace of PEPP purchases could be
interpreted as signalling a revision to the overall expected stock of purchases, thereby influencing
yields through the well-established stock channel of quantitative easing.
As already noted in the discussion of Charts 7 and 8, the right panel of Chart 9 shows the quarterly
evolution of the risk-free rate and the sovereign spreads. During 2020, the decline in the risk-free rate
and the stabilisation of sovereign spreads meant that PEPP purchases decelerated quite quickly during
the summer of 2020. From the start of 2021, the increase in the risk-free rate posed a challenge for the
calibration of PEPP since, all else equal, a premature tightening in financing conditions posed a risk to
medium-term inflation dynamics. In early 2021, the assessment that a significant proportion of the
increase in the risk-free rate constituted a spillover from rising yields in the US market reinforced the
case for leaning against the yield increase. Accordingly, there was a step up in the PEPP purchase
pace during the second and third quarters of 2021.
However, as shown in the left panel of Chart 9, the narrowing of the pandemic inflation gap (which is
the difference between the end-of-horizon projected inflation rate in the pre-pandemic December 2019
projections and the latest end-of-horizon projected inflation rate) acted as a countervailing force. While
there was already a slight narrowing in the December 2020 projections (the end-of-horizon projected
inflation rate increased from 1.3 per cent to 1.4 per cent), the improvements in the September 2021 and
December 2021 projection rounds (to 1.5 per cent and 1.8 per cent respectively) warranted a more
substantial reduction in the pace of purchases in the last quarter of 2021 and the first quarter of 2022.
Chart 9
Longer-term interest rates, the pandemic inflation gap and PEPP purchase amounts
(left panel: left-hand scale: EUR billions; right-hand scale: basis points; right panel: percentage per annum)
Notes: The pandemic inflation gap is defined the difference between the pre-pandemic forecast of 1.6 per cent and
the end-of-horizon projection for each quarter. The end-of-horizon projection corresponds to the most ahead
annual forecast of the Eurosystem staff macroeconomic projections. The 10y risk-free rate corresponds to the
tenyear OIS rate. Yields and rates are averaged over the quarter.
The calibration of the TLTRO III programme in response to the pandemic has provided significant
monetary accommodation in a manner that is designed to protect credit supply. In particular, an
important innovation was to set the minimum borrowing rate at 50 basis points below the average
interest rate on the deposit facility. This lowered funding costs for bank-intermediated credit, even
without a generalised reduction in the main traditional policy rates. The remarkable expansion in the
scale of TLTRO III operations, which have increased by about €2.2 trillion during the pandemic, is
visible in Chart 1. ECB estimates indicate that TLTRO III liquidity can be expected to boost loan
volumes considerably, to the tune of four percentage points cumulatively by 2022, and also contributed
to a substantial lowering of lending rates to non-financial corporations. The euro area bank lending
survey confirms that TLTRO funding has boosted loan generation and eased credit terms and
conditions (Charts 10 and 11).
Chart 10
Use of TLTRO III liquidity by banks
(percentages of banks over the past and next six months)
Source: Euro area bank lending survey (BLS).
Notes: Banks were asked to indicate the relevance of the different objectives, with multiple mentions possible.
"Purchasing financial assets" is the average of "purchasing domestic sovereign bonds" and "purchasing other
financial assets". "Granting loans" refers to loans to the non-financial private sector. The last period denotes
expectations indicated by banks in the October 2021 round of the BLS. The latest observations are for the third
quarter of 2021.
Chart 11
Bank lending conditions and loan growth to firms and households
(left side: net percentages of banks reporting an easing (+)/tightening (-) of credit standards and an increase
(+)/decrease (-) in loan demand; right side: percentages)
Sources: ECB (BLS and balance sheet items (BSI) statistics) and ECB calculations.
Notes: The BSI and BLS series on households refer to loans for house purchase. Loan growth is based on notional
stocks. Loans are adjusted for seasonality and for sales, securitisation, and cash pooling activities. The latest
observations are for the fourth quarter of 2021.
Chart 12 shows the time series of the average euro area lending rate, which incorporates the factors
that banks consider when pricing a loan: the base rate (a term overnight interest swap rate), funding
costs, credit risk and the cost of capital. It is apparent that, despite an increase in credit risk, the
supportive conditions of the ECB funding have contributed to keeping the lending rate around the
historically low levels it had reached before the pandemic crisis.
Chart 12
Lending rate to non-financial corporations and the intermediation wedge
(percentages per annum)
Sources: ECB (MIR statistics) and Bloomberg.
Notes: The intermediation wedge is the distance from the base rate (three-year OIS) to the realised lending rate,
as measured by the observed lending rate for non-financial corporations. The latest observations are for January
2022.
The impact of the pandemic monetary policy measures
To assess the contribution of monetary policy to countering the pandemic shock, a natural point of
comparison is the calculation of the adverse impact that would have materialised in the absence of the
monetary policy response. The alternative path the economy would have taken without responsive
monetary policy can be calculated by constructing counterfactual financial conditions and then feeding
these into macroeconomic models.
A first approach to calculating such counterfactual financial conditions is to employ pre-pandemic
impact estimates of past monetary policy recalibrations in order to calculate by how much higher, for
example, yields would have been absent monetary policy action. Averaging across a range of models,
ECB staff analysis based on this approach indicates that, without our monetary policy measures, euro
area output would be 1.8 percentage points lower and the annual inflation rate would be 1.2 percentage
points lower by 2023 in cumulative terms.
Chart 13
Estimated impact of the ECB's decisions since March 2020 on the central tendency of
inflation and economic activity
(percentage points)
Notes: The estimated impact across a suite of models refers to the average across a set of models used by the
Eurosystem for policy simulations, a Bayesian vector autoregression model (Rostagno, M., Altavilla, C., Carboni,
G., Lemke, W., Motto, R., and Saint Guilhem, A. (2021), "Combining negative rates, forward guidance and asset
purchases: identification and impacts of the ECB's unconventional policies", Working Paper Series, No 2564,
ECB), the NAWM-II model, and the ECB-BASE model.
However, these calculations are based on elasticities of financial conditions to policy impulses that are
estimated based on data observed in non-stressed market conditions. This implies, in turn, that the
impact estimates are typically moderate in size. It follows that this first approach to quantifying the
effects of our policies is likely to underestimate by a wide margin their true effect under the
macrofinancial conditions generated by the extraordinary pandemic shock. This approach likely also
understates the overall impact of monetary policy during the pandemic, since it does not take into
account that fiscal policy would likely have been less countercyclical in the absence of favourable
financing conditions.
More generally, in the macroeconomic models that central banks typically use for simulation and policy
analysis, it is challenging to reflect the role of monetary policy measures in providing a credible
backstop against adverse tail risks, such as an arrest in the flow of credit to the economy and acute
financial instability. A more realistic assumption for constructing counterfactual financial conditions is to
recognise that, in the event of policy inaction, financial markets - which were already highly
destabilised - would have gone into a tailspin, sending the economy into a meltdown.
Building on recent advances in the macro-econometrics of estimating the impact of financial tail risks,
preliminary results produced by ECB staff indicate that the ECB's removal of the financial tail risk
associated with the pandemic ensured a degree of support to growth that is several times larger than
the impact derived by the more limited calculation shown in Chart 13. In particular, as Chart 14 shows,
econometric analysis that quantifies the impact of a tightening in euro area financial conditions - not
only on the mean of output growth but also on different parts of its empirical distribution through
quantile regression - shows a negative impact on activity that is several times larger when the
economy is experiencing headwinds than in a situation in which a tightening occurs during better
economic times.
Chart 14
Impact of financial tightening on real GDP growth under different quantiles of the
distributions
(percentage points)
Source: ECB calculations.
Notes: The chart shows the impact of a one standard deviation increase in the euro area composite indicator of
systemic stress (CISS) on the one-year ahead annual growth rate of euro area GDP, by GDP decile. The estimates
are based on quantile regressions of the one-year ahead GDP growth rate on the CISS index. The estimation is
carried out for the period January 1999 to December 2021, based on monthly observations. The shaded area is
the 64% confidence interval for the estimates of the coefficients, while the linear model refers to the ordinary least
squares estimate.
Chart 15 shows the evolution of the projected inflation path (as summarised by the end-of-horizon
projected inflation rate). Over the period 2018-2019, the end-of horizon projections for inflation had
gradually declined before the pandemic, such that the risk of downside de-anchoring was already
elevated before the pandemic. The chart shows the sharp deterioration in the inflation outlook following
the pandemic shock, with the end-of-horizon projection for HICP dropping to 1.3 per cent in the June
2020 forecast.
Chart 15
End-of-horizon projections for HICP inflation and HICP inflation excluding energy and
food
(percentages per annum)
Sources: ECB/Eurosystem staff macroeconomic projections and ECB calculations.
Note: The latest observations are for the March 2022 ECB staff macroeconomic projections.
The medium-term inflation outlook substantially recovered from mid-2021 onwards, following the
successful development of vaccinations and the reopening of the economy - some pandemic-induced
volatility notwithstanding - that generated a forceful rebound in activity over the course of the year.
Important milestones were the upgrade to an end-of-horizon inflation forecast of 1.4 percent in June to
1.5 percent in September 2021, a large step to 1.8 percent in the December 2021 round, and the
further increase to 1.9 percent in March 2022. The improvement in the inflation outlook in the second
half of 2021 resulted in the December 2021 assessment that the stance objective of the PEPP - to
counter the negative pandemic shock to the path of inflation - was fulfilled.
In making monetary policy decisions, the Governing Council systematically assesses the proportionality
of its measures, as we also emphasised in the outcome of our monetary policy strategy review last
8 ]
July.[ This assessment includes an analysis of the benefits and the possible side effects of monetary
policy measures, their interaction and their balance over time. The assessment of the benefits applies
to the transmission to financing conditions as well as to the intended effect on inflation, while the
assessment of possible side effects relates to unintended effects on the real economy and on the
financial system.
With regard to households, by putting downward pressure on longer-term interest rates, asset
purchases tend to lower longer-term interest rates for private borrowers and savers. Beyond these
direct effects, the contribution of asset purchases to more benign macroeconomic conditions overall
supports household incomes, through higher employment, growing wages and positive wealth effects.
[ 9 ]
Distributional implications are also routinely tracked, and the assessment is that monetary policy
measures, including asset purchase programmes contribute to a reduction in income inequality through
positive employment and wage effects, while their implications for wealth inequality can be mixed, as
10 ]
asset holdings tend to exhibit heterogeneity.[
For corporates, the protection of favourable financing conditions likely contributed to the survival of
many firms that would otherwise have been forced to shut down towing to the catastrophic loss of
revenues during the pandemic. Low bond rates and banking rates, together with supportive credit terms
and conditions, played a direct role in underpinning the survival of many firms. Yet more powerful was
the indirect role by which favourable financing conditions enabled large-scale fiscal borrowing that in
turn enabled governments to provide an array of subsidies and credit guarantees to firms. While
favourable financing conditions and fiscal subsidies might have kept alive some zombie firms, the
return to pre-pandemic GDP levels by the end of 2021 suggests that a comprehensive approach to
supporting firm survival was broadly appropriate.
In assessing the implications of our monetary policy for the conduct of fiscal policy, it is essential to
recognise that fiscal policy has been front and centre in averting the propagation of the economic fallout
from the pandemic, as it is especially well-suited to provide targeted economic support. Fiscal policy
also plays an important role as driver of aggregate demand, where the positive contribution from fiscal
policy to demand marks an important contrast to the contractionary stance adopted in the wake of the
global financial crisis. The pandemic experience thus serves to demonstrate that in response to a
severe shock, simultaneous and ambitious policy actions by governments and central b