Central Banking, Fast and Slow

As the global economy emerges from the COVID-19 shock, systemically important central banks are faced with the unenviable task of deciding when and how quickly to phase out extraordinary stimulus measures. While there is no easy answer, there are clear criteria for maintaining policy credibility.

CAMBRIDGE – Economic-policy discussions in the eurozone, the United Kingdom, and the United States increasingly revolve around the question of when and how quickly central banks should pull back the uber-stimulus measures implemented last year in response to the COVID-19 pandemic.


There are no easy answers. Both parts of the question call for finely balanced judgment calls to account for uncertainties that remain in play. Policy changes by major central banks can have far-reaching implications for economic and financial well-being, affecting not just those directly involved but also the many countries that will end up “importing” the effects of the decisions.

A simple way to frame the debate is to think of a road trip. In the car are two groups that agree on three things: the “destination” is to achieve high, durable, inclusive, and sustainable economic growth; the route to get there is far from straight; and the car has good forward momentum.

After that, the two camps disagree. One group believes that much of the remaining journey will be uphill and is therefore not too worried about the curves along the way. It would prefer to keep its foot on the accelerator, pedal-to-the-metal, lest the vehicle decelerate or stall.

The other passengers anticipate a downhill journey with many treacherous curves. With the vehicle gaining speed, this group would prefer to ease off the accelerator and avoid risking a sudden “economic handbrake turn,” as Andy Haldane, the Bank of England’s former chief economist, recently put it.