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The Threats to Recovery

Many of the monetary and fiscal measures in advanced economies over the past 12 months were necessary and unavoidable. But as policymakers eye a possible recovery in 2021-22, they must be vigilant about the side effects of prolonged stimulus.

NEW YORK – Over the past year, rich-country governments and central banks have provided unprecedented fiscal and monetary stimulus to help mitigate the economic impact of the COVID-19 pandemic. Getting back to economic normalcy – whatever modified form that takes in 2021 and 2022 – will require advanced economies to start weaning themselves off official support before too long, and thereby avoid dangerous new complications.

On the monetary-policy front, central banks around the world did whatever was necessary to calm financial markets when the pandemic struck in the spring of 2020. They have since maintained a highly supportive stance, with historically low and in some cases negative real policy rates. Monetary policymakers reused and enlarged existing tools, and fashioned new ones as needed.

These crucial efforts have greatly inflated major central banks’ balance sheets. In December 2020, the combined assets of the US Federal Reserve, the European Central Bank, the Bank of Japan, and the People’s Bank of China stood at a staggering $28.6 trillion. The ECB accounted for $8.5 trillion of this total, and the Fed $7.3 trillion, while the BOJ and the PBOC had total assets of $6.8 trillion and $5.9 trillion, respectively.

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