The International Monetary Fund (IMF) has warned that 'highly expansionary monetary policy' executed by central banks around the world to ease pandemic crisis may pose a challenge to policymakers post COVID-19 recovery.
The fund noted that in order to maintain the flow of credit to households and firms and thus support aggregate demand, the central banks continued with loose policies. Liquidity needs by firms and households have been met by additional debt, which has for the time being cushioned the devastating effects of the pandemic crisis.
In the later Global Financial Recovery, the IMF estimated a likely tradeoff for policymakers.
"Accommodative policy boosts short-term activity but at the cost of a potentially greater downside risk to growth in the medium term as a result of increased non-financial sector leverage," the report said.
It suggested mitigating the trade-off through macroprudential tools. The report said that tightening measures targeted at the eligibility of borrowers or at liquidity-related limits on banks are associated with slower buildups in leverage of either households or nonfinancial firms.
Frequently Asked Questions
A vaccine works by mimicking a natural infection. A vaccine not only induces immune response to protect people from any future COVID-19 infection, but also helps quickly build herd immunity to put an end to the pandemic. Herd immunity occurs when a sufficient percentage of a population becomes immune to a disease, making the spread of disease from person to person unlikely. The good news is that SARS-CoV-2 virus has been fairly stable, which increases the viability of a vaccine.
There are broadly four types of vaccine — one, a vaccine based on the whole virus (this could be either inactivated, or an attenuated [weakened] virus vaccine); two, a non-replicating viral vector vaccine that uses a benign virus as vector that carries the antigen of SARS-CoV; three, nucleic-acid vaccines that have genetic material like DNA and RNA of antigens like spike protein given to a person, helping human cells decode genetic material and produce the vaccine; and four, protein subunit vaccine wherein the recombinant proteins of SARS-COV-2 along with an adjuvant (booster) is given as a vaccine.
Vaccine development is a long, complex process. Unlike drugs that are given to people with a diseased, vaccines are given to healthy people and also vulnerable sections such as children, pregnant women and the elderly. So rigorous tests are compulsory. History says that the fastest time it took to develop a vaccine is five years, but it usually takes double or sometimes triple that time.
"Measures aimed at curbing foreign currency exposures of banks are effective at reining in buildups of nonfinancial corporate leverage in emerging markets. Tightening macroprudential measures can also improve the intertemporal trade-off, reducing downside risk in the medium term and mitigating the effects of loosening financial conditions."
The pandemic-induced lockdowns disrupted the revenue streams of businesses around the world, which led to an increase in leverage in corporate balance sheets and households.
"Policymakers, therefore, need to stay attuned to the emerging financial stability risks as the post-pandemic recovery takes hold," the report said.