Revolution without revolutionaries: interrogating the return of monetary financing

This paper analyses how the role of central banks changed since the global financial crisis, and how this directional change was accelerated by the outbreak of Covid-19. Many rich countries such as the UK, the EU and the US that experienced decades of monetarism and central bank independence have adopted 'shadow' monetary regimes since 2008.

This entails the active intervention of central banks aimed at pursuing economic stability through the purchase of large shares of sovereign debt: such policies were reinforced since the Covid-19 outbreak. Gabor provides a historical account of these dynamics and an accurate distinction of the of 'shadow' regime from the 'subordinated' regime. The latter was in place in the aftermath of the Second World War, it was rooted in the Keynesian idea of fiscal dominance and considered central bank intervention a tool to keep the cost of fiscal policy under control and boost aggregate demand. According to Gabor, the persistent intervention of central banks in the government bonds market is a 'revolution' that won't allow real economic recovery in the post-pandemic and should be replaced with fiscal-monetary coordination.

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Comment from our editors:

Gabor clarifies the fundamental differences between 'shadow' and 'subordinated' monetary systems, which can be mistakenly overlapped given that both entail the active intervention of central banks in the government bonds market. This essay also provides an interesting description of the historical passages that led to this transition, and it compares the evolution of a number of rich countries in these time frames. The solution proposed in the final section is both feasible and necessary, particularly in the EU where fiscal-monetary coordination is complex. Quantitative easing and active monetary intervention are increasingly adopted as the main tools to fight economic crisis, hence this essay provides insightful clarifications on topics that are extremely relevant nowadays.

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