The alternative to maintaining that posture — to claiming, in other words, that monetary policy is still distinct from fiscal policy — would be for central banks to simply erase the addition to public debt and directly finance the needed public spending. Thanks to the pandemic, an eventual recourse to direct monetary financing, which fully merges monetary and fiscal policy, is possible and perhaps even probable.
It could be done in a variety of ways, involving much less drama than the term “helicopter money” suggests. The simplest from an accounting point of view would be to announce that some of the bonds acquired by the central bank would henceforth be interest-free and irredeemable. The monetary expansion provided by the bond purchases would then be permanent, and future taxes wouldn’t need to rise to cover the government’s debt-service costs.
Either the central bank becomes entirely passive, financing whatever amount of public debt the government believes is necessary; or, at a minimum, it becomes the government’s partner in designing the size of the needed monetary-and-fiscal intervention. In the first case, it no longer has any say in monetary policy; in the second, it cannot expect to remain above the political fray.
In either case, its independence is over, and a new post-pandemic era of central banking will have begun.
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