The Central Banks Role in the Coronavirus Pandemic

The Central Banks Role in the Coronavirus Pandemic

The Central Banks Role in the Coronavirus Pandemic

In most developed nations, central banks have been integral to maintaining economies during the Coronavirus Pandemic. In the United States, the Federal Reserve dropped the interest rate right down to 0.250% this year, hoping to stimulate institutional borrowing and bolster the economy. The decision was effective at invigorating both the home and stock markets, but there are other factors at play, such as the $2 trillion of economic relief provided by the CARES Act passed in March.

Other advanced economies, including the United Kingdom and Japan, have also relied on their central banks to lower interest rates and offset the economic downturn. In Japan, the central bank has gone as far as implementing a negative rate of -0.100%. Japan’s economy has weakened during the Pandemic, but it is still fully operational. The strategy of lowering the interest rate appears to be working. Japan also uses mask mandates and has distributed personal masks to help limit the spread of COVID-19. A combined social and economic effort has proven to be effective.

However, there are nations without large central banks or social services in place to support people and the economy during the pandemic. How are these places managing the current conditions?

Nations Without Central Banks

The list of nations without central banks is unsurprisingly small. It includes Andorra, Kiribati, Liechtenstein, Marshall Islands, Federated States of Micronesia, Monaco, Nauru, Palau, Panama, and Tuvalu.

Some nations are simply too small or have made political alliances to eliminate the need for central banks. Liechtenstein, for example, hands its regulatory and central bank policy functions to Switzerland. Panama, a major financial hub, relies entirely on the forces of the free market to maintain its money supply.

How Do Non-Central Bank Nations Respond to the Coronavirus?

There doesn’t appear to be any real relationship between effective coronavirus response and having a central bank.

In Panama, lockdowns were used earlier in the year to limit the spread of COVID-19. The government declared a state of emergency in March, freeing up $50 million (USD) to combat the pandemic [1].  Panama doesn’t rely on a central bank interest rate to stimulate economic growth. It is a country driven by a free market.

It holds vast dollar reserves and uses the dollar as its official currency. The lack of a central bank cannot be viewed as detrimental to its Coronavirus response. Panama is a high-income country but 14.1 percent of the population still live in poverty. It has seen 181,166 confirmed COVID-19 cases with 3,241 deaths. Panama has a population of 4.1 million.

In Monaco, which is an ultra-high income country, there has been no need for widespread lockdowns or quarantines. The nation hasn’t needed to turn to a central bank to support the financial markets. Like Panama, Monaco’s economy relies on tourism and banking. Banking regulations are closely aligned with the European Union. The nation has seen just 648 confirmed COVID-19 cases with 3 deaths.

The Monaco government has implemented social programs to limit the spread of the pandemic, including a home patient follow up care team that helps to limit the strain on hospitals and clinics [2]. Monaco’s resident population is less than 40,000.

Is A Central Bank Necessary During the Coronavirus Pandemic?

In large regulated economies, central banks already have control over target interest rates. They have intervened with debt purchases and lowered interest rates to keep their respective markets afloat.

In smaller nations that lack central banks, the need for fiscal policy intervention is not as severe. Smaller countries such as Panama and Monaco have manage to navigate the virus without central bank intervention.

 

Resources

  1. CNN – Panamá declara estado de emergencia nacional y anuncia medidas contra el coronavirus – Panamá declara estado de emergencia nacional y anuncia medidas contra el coronavirus | CNN
  2. Monaco Tribune – The little-known body getting Monaco through the pandemic – https://www.monaco-tribune.com/en/2020/12/the-little-known-body-getting-monaco-through-the-pandemic/