Bridge over ocean
23 November 2021 Position Paper

Money in Covid Times

A primer on central bank response measures to COVID-19

  1. Anas Taoufik Ben Chekroun
  2. Olivier Fines, CFA
  3. Sviatoslav Rosov, PhD, CFA
  4. Simon Johnson, PhD
  5. Ronald A. Kurtz

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.

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.

Money in Covid Times Read the full article (PDF)

Our position

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?

Main Points

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.

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