[EAI Working Paper] Global Political Economy Order After the COVID Crisis Series ⑨_ US Economic Response Strategy: Focusing on Monetary Policy

I. Introduction

The COVID-19 pandemic, which began in early 2020 and spread globally, is still ongoing. Despite the development of COVID vaccines, the emergence of unexpected variables such as the Delta variant and vaccine hesitancy makes it difficult to predict when the "end of COVID" will be. The COVID-19 crisis has severely impacted the real sector of the global economy. According to recent estimates by the Asian Development Bank (ADB), the COVID-19 crisis is projected to cause damages equivalent to nearly 5% of global GDP, or $4 trillion (ADB, "Asian Economic Outlook 2020"). This has led to a decline in the operating rates of global production networks, a sharp decrease in employment and production activities, and sluggish global trade and investment. Robert Barro, an economist at Harvard University, has stated that the COVID-19 crisis could potentially lead to a 6% decrease in real GDP per capita (average of 43 countries) and an 8% decrease in real consumption per capita, along with a 26% drop in real stock returns and a 14% drop in real short-term government bond yields, comparable to the Spanish Flu, according to some experts by mid-2020 (Heo Yoon, Munhwa Ilbo, March 31, 2020, column, "Coronomics Global Economy").

At least in the asset markets, these predictions have (so far) proven to be unfounded. The Dow Jones Industrial Average has far surpassed its historical high of 32,777, hovering around 35,000, and the S&P 500 has broken its record high 47 times. Stock prices in South Korea and Japan have also continued to surge. The KOSPI in South Korea has reached new highs multiple times, and Japan's Nikkei index reached 30,000 for the first time since the bubble burst in the early 1990s. Housing prices have also risen significantly worldwide. The asset market seems to have benefited from the COVID-19 virus. It has even been said that this is the first era where houses, stocks, and commodities have simultaneously experienced a "bubble" (Chosun Ilbo, August 16, 2021).

The growing divergence between the real economy and asset markets during the COVID-19 pandemic is widely attributed to the expansionary monetary policies of central banks (Mallaby 2020). This implies that the unprecedented and massive liquidity supply from central banks has laid the foundation for the boom in asset markets.[1]The three major central banks—the Federal Reserve (hereinafter referred to as the Fed), the European Central Bank (ECB), and the Bank of Japan (BOJ)—have been maintaining zero (or negative) interest rates and engaging in unlimited quantitative easing since March 2020.[2]In the case of the Fed, it continues to maintain its accommodative monetary policy stance even in 2021, as concerns about inflation have grown due to monetary expansion. The US inflation rate in the second quarter of 2021 was 5.6%, significantly exceeding the Fed's target of 2%, yet there has been no change in monetary policy. The official reason provided by the Fed is that the high inflation is temporary and that employment indicators are still below expectations.

What is noteworthy here is the Fed's emphasis on "employment." As will be discussed in detail below, since the advent of the neoliberal era in the 1980s, the core monetary policy of central banks, including the Fed, has been focused on price stability, i.e., inflation management. The Fed's emphasis on employment may foreshadow a future shift in central bank policy. Will this change by the Fed become a new normal for central banks in the post-COVID era, rather than being temporary? This paper attempts a preliminary analysis of this question, as the COVID-19 crisis is still ongoing, central bank policy responses are still in progress, and empirical evidence and data for in-depth analysis are still lacking. The core of this paper is to closely examine the Fed's COVID response policies, particularly its unconventional monetary policies, and analyze the political and economic context in which these policies emerged and persist. Through this, we will predict the new normal for central banks in the post-COVID era. We will explore whether unconventional monetary policies by the Fed can become the new normal for central banks, accompanied by a change in core policy principles.

This paper proceeds as follows. Chapter II describes the trend of changes in the core policy stance of central banks, examining the period from after World War II to the present, with a focus on the price stability-oriented policies that became entrenched with the rise of neoliberalism after the 1980s. Chapter III is divided into two parts. Section 1 delves into the unconventional monetary policies employed by the Fed after the COVID-19 crisis. Section 2 analyzes the Fed's unconventional monetary policies from various political and economic perspectives. Chapter IV concludes by summarizing the preceding discussion and discussing the implications for the post-COVID era.

II. Trends in the Evolution of Central Bank Core Policy Stances

Central banks are the key institutions responsible for formulating and implementing monetary policy in modern states. The primary roles of central banks include price stability, employment enhancement, economic growth, and acting as a lender of last resort. First, central banks are responsible for stabilizing prices and maintaining the value of currency. Many central banks fulfill this role by setting official and unofficial targets for inflation indicators. Central banks also play a pivotal role in achieving social stability by fostering low unemployment and high economic growth through monetary policy. Furthermore, central banks function as lenders of last resort during economic crises. They aim to stabilize financial markets by providing funds to financial institutions facing temporary liquidity issues or insolvency due to large-scale corporate bankruptcies or debt crises, utilizing their exclusive right to issue currency.

Since the 1980s, central banks have often placed the greatest emphasis on price stability among their various roles, implementing policies accordingly. For example, the European Central Bank has explicitly stated that price stability is the primary objective of the Eurosystem and holds overriding importance among its various goals (European Central Bank, n.d.). The rationale is that price stability is not only important in itself but is also the only objective that can be fundamentally altered through monetary policy, unlike full employment or balanced economic growth. Similarly, although the Federal Reserve has, since the enactment of the "Humphrey-Hawkins Act" in 1978, specified employment and price stability as its dual mandate, in practice, it has prioritized price stability, much like the European Central Bank. Daniel L. Thornton, Vice President and Economist at the Federal Reserve Bank of St. Louis, has pointed out that despite the Fed's explicit dual mandate, the Federal Open Market Committee (FOMC) has, until recently, avoided making policy pronouncements in terms of full employment or unemployment (Thornton 2012b).

Historically, the primary roles expected of central banks have not always been the same and have varied with the times. In particular, the focus on price stabilization policies is considered to have emerged in conjunction with the rise of monetarism after the 1980s. In this regard, Gerald Epstein evaluates this emphasis on inflation control as being in complete opposition to the historical trend that previously emphasized the role of central banks in driving economic growth (Epstein 2006). Following World War II, central banks in developed countries such as the United States, Europe, and Japan played roles in meeting social needs, such as rebuilding national economies and supporting industrial finance under government control (Epstein 2006). During the same period, central banks in developing countries also played a crucial role in mobilizing and allocating resources for industrialization and economic development (Amsden 2001; Epstein 2006). Furthermore, concerns about soaring unemployment after the war led many countries to prioritize demand management based on Keynesianism and adopt high employment and growth as central bank objectives (Capie et al. 1994). The "Employment Act of 1946" in the United States, which declared it the responsibility of the federal government to promote maximum employment, production, and purchasing power, serves as a prime example. In summary, there is broad consensus that the current dominant practice of central banks prioritizing price stability has not always been the case; prior to the 1980s, economic growth through investment promotion and employment enhancement was the core principle of central banking.

The experience of stagflation in the 1970s is cited as a major turning point in the shift of central banks' policy stance (Capie et al. 1994). As mentioned earlier, policymakers in major countries after World War II sought to achieve full employment through demand management. Monetary policy was used as a tool to achieve these goals, alongside fiscal and income policies. In particular, according to Keynesian economic theory, widely accepted at the time, there was a stable inverse relationship between unemployment and inflation as described by the "Phillips curve." Therefore, policymakers believed they could tolerate a certain level of inflation to reduce unemployment to the "natural rate of unemployment" (Bordo and Orphanides 2013). However, as predicted by Edmund Phelps and Milton Friedman (Phelps 1967; Friedman 1968), expansionary demand management policies led to rising inflation, and as participants in the production and labor markets developed rational expectations about inflation, progressively higher inflation became necessary to maintain low unemployment (Capie et al. 1994). In addition, the collapse of the Bretton Woods system removed the nominal exchange rate anchor, and coupled with the oil shocks, inflation began to rise sharply, from around 1% in 1964 to 14.5% in 1980. During the same period, unemployment also rose from 5% to 7.5%.

Stagflation, characterized by a simultaneous sharp rise in prices and unemployment, was an event that contradicted prevailing economic wisdom. This experience led central bankers and economists to recognize that there was no long-term trade-off between inflation and unemployment, and that expansionary monetary policies, due to the time inconsistency problem, could lead to inflation rather than achieving desired outcomes in employment and production (Kydland and Prescott 1977; Calvo 1978; Barro and Gordon 1983; McCallum 1995). In other words, expectations about future monetary policy influence wage and price setting. Furthermore, as the effects of monetary policy are long-term and uncertain, the argument that targeting medium- to long-term price stability is more appropriate than short-term demand management for employment and production gained traction (Friedman 1968). Thus, the emphasis on price stability as a goal for central banks emerged as the risks of excessive expansionary policies by central banks and the negative impacts of inflation came to the forefront (Mishkin and Posen 1997).

The importance of price stability gained further traction as monetarist policies proved effective in mitigating stagflation. From the mid-1970s, the central banks of West Germany and Switzerland aimed to curb inflation through monetary control, and as a result, maintained lower inflation rates during the stagflation period compared to other European countries (Thornton 2012a; see Figure 1). Furthermore, in 1979, Paul Volcker, Chairman of the Federal Reserve, announced anti-inflation measures centered on monetary tightening, and subsequently succeeded in stabilizing inflation through extremely high interest rates (reaching 20% annually), despite enduring high unemployment and a short-term recession. Margaret Thatcher, who became Prime Minister of the United Kingdom in the same year, also sought to achieve price stability based on monetarist principles and succeeded in reducing inflation. As demonstrated by the ability of central banks to control inflation through monetary policy, the previous notion that monetary policy had no significant impact on aggregate demand and inflation lost ground (Thornton 2012a). Consequently, various other countries began to adopt monetarist policies (see Figure 2 below).

[Figure 1] European Inflation Rates, 1970-1985 (Thornton 2012a, p. 70)

[Figure 2] Inflation Rates in Major Countries, 1961-2000 (Bordo 2013, p. 3)

The monetarist emphasis on the price stabilization role of central banks led to the emergence and spread of the "inflation targeting" regime in the early 1990s, which involved setting explicit and implicit inflation targets. In particular, the "Lucas critique" (Lucas 1976) of traditional economic models that did not account for rational expectations of economic agents influenced the diffusion of the inflation targeting regime. This is because the Lucas critique made central bankers and economists recognize the importance of credibility in disinflationary policies for inflation management (Thornton 2012a). In this context, starting with New Zealand, Canada, and the United Kingdom in the early 1990s, many developed countries announced explicit inflation targets, and from the late 1990s, developing countries, including Chile and the Czech Republic, also began to adopt inflation targeting policies (see Figure 3 below). South Korea also adopted this policy in 1998.

In the United States, the FOMC previously announced a target range for inflation based on the Personal Consumption Expenditures Price Index (PCEPI) on a regular basis. Going further, the Federal Reserve explicitly declared a target of 2% inflation for the first time in 2012. This trend reflects the views of central bankers and mainstream monetarist scholars since the 1980s that price stability should be the long-term objective of monetary policy.

[Figure 3] Countries Adopting Inflation Targeting Regimes (Source: Bank of England)

The concentration of central bank roles on price stability and acting as a lender of last resort during economic crises in the neoliberal era is also confirmed in the research by Stanley Fisher (2005) and Sylvia Maxfield (1997).[3]These two studies, published in the late 1990s and early 2000s, are representative analyses of central banks. Both studies excluded employment enhancement and economic growth from the primary functions and roles of central banks. Both studies summarized the main tasks of central banks into the following three policies. The first is credit creation and debt management through interest rate adjustments, including inflation management. The second is maintaining appropriate exchange rates and managing foreign exchange reserves. The third is financial stability, referring to the lender of last resort function of central banks. The studies by Fisher and Maxfield describe the archetype of the "neoliberal central bank."

III. The Political Economy of the Fed's Unconventional Monetary Policy

1. The Fed's Unconventional Monetary Policy Response to COVID-19

Central banks aim to promote price stability, employment, and economic growth through monetary policy and act as lenders of last resort when economic conditions deteriorate. As discussed above, these roles and functions of central banks have been coordinated around specific core policy stances, with price stability being the core of monetary policy since the 1980s. During the COVID-19 response, the Fed, even resorting to the new concept of "average inflation targeting"[4], adhered to an expansionary monetary policy that tolerated inflation. The Fed has historically preemptively raised its benchmark interest rate when prices rose, but it has stated that it would at least temporarily suspend this policy. The urgency of employment stagnation and economic recession was cited as the reason by the Fed, and unconventional monetary policy became the means. First, we examine the unconventional monetary policies employed by the Fed. Subsequently, we will demonstrate that through the implementation of these unconventional monetary policies, the Fed has unprecedentedly assumed the roles of "fiscal partner" and "investor of last resort." We will also discuss the specific programs and execution details associated with these roles, providing a comprehensive overview of the Fed's unconventional monetary policies during the COVID-19 crisis.[5]The Fed has historically preemptively raised its benchmark interest rate when prices rose, but it has stated that it would at least temporarily suspend this policy. The urgency of employment stagnation and economic recession was cited as the reason by the Fed, and unconventional monetary policy became the means. First, we examine the unconventional monetary policies employed by the Fed. Subsequently, we will demonstrate that through the implementation of these unconventional monetary policies, the Fed has unprecedentedly assumed the roles of "fiscal partner" and "investor of last resort." We will also discuss the specific programs and execution details associated with these roles, providing a comprehensive overview of the Fed's unconventional monetary policies during the COVID-19 crisis.

Unconventional monetary policies are used when traditional central bank monetary policies, such as policy rate adjustments, are no longer effective in achieving their objectives. In simpler terms, when the policy rate reaches its effective lower bound and further interest rate adjustments are insufficient to stimulate the economy, central banks resort to unconventional monetary policies. Central banks, including the Fed and the ECB, began to actively employ unconventional monetary policies in response to the 2008 global financial crisis. Although the Bank of Japan was the first to implement quantitative easing, a form of unconventional monetary policy, in 2001 for economic stimulus, it was initially considered an exceptional measure (Park, Katada, Chiozza, Kojo 2018, 41-50). The 2008 global financial crisis marked a transition for unconventional monetary policy from being unfamiliar to becoming a global new normal (Geithner 2014). This signifies that unconventional monetary policies have been newly incorporated into the economic crisis response policy manuals of central banks (Ben Bernanke 2013).

Unconventional monetary policies generally encompass the following four types: Negative Interest Rate Policy (NIRP), Quantitative Easing (QE), Forward Guidance, and Credit Policy. Negative Interest Rate Policy refers to the central bank setting its policy rate below zero. It typically operates by charging commercial banks a fee for holding deposits at the central bank.[6]The purpose of negative interest rate policy is to encourage commercial banks to lend to businesses or invest in securities, thereby stimulating domestic demand, rather than holding reserves at the central bank. Prior to the COVID-19 crisis, from 2012 to 2018, Denmark, Sweden, Switzerland, Hungary, Japan, and the European Central Bank used negative interest rate policies.

Quantitative easing is the most well-known unconventional monetary policy and is also referred to as "Large Scale Asset Purchases" by the Fed. QE is a policy where the central bank aims to stabilize financial markets by supplying ample liquidity to the market through the purchase of long-term government bonds and other securities, and is considered when further reductions in policy rates are difficult. In particular, unlike open market operations that target short-term interest rates, QE is implemented by the central bank purchasing medium- to long-term assets to lower long-term interest rates. Ultimately, central bank QE is a policy to expand financial market liquidity by increasing the prices of safe assets.

Forward guidance is a communication strategy employed by central banks. In the case of the Fed, it allows economic agents to understand the central bank's future monetary policy direction through mechanisms such as the Chair's press conferences, the Jackson Hole Symposium, and the release of FOMC meeting minutes, thereby influencing their economic outlook, expectations, and choices.[7]A characteristic of forward guidance as an unconventional monetary policy is that it is rarely used in isolation. This is because forward guidance provides information about other unconventional monetary policies, such as negative interest rates, quantitative easing, or credit policies, when they are being implemented. For example, the central bank signals to the market, either explicitly or implicitly, about when the negative interest rate policy will be maintained (information on duration) and under what conditions quantitative easing will begin tapering (information on conditions).

Finally, there is credit policy. Credit policy aims to revitalize financial markets by supplying liquidity to financial institutions and supporting credit markets. While the unconventional monetary policies discussed earlier target the economy as a whole, credit policy is a support measure aimed at reviving specific strained financial markets. For instance, the Fed has provided funds to financial institutions through discount window lending and has enhanced liquidity by lending US Treasury securities held by the Fed against corporate bonds as collateral. Credit market support has also included measures such as supporting asset-backed securities (ABS).

The Fed implemented these unconventional monetary policies through various liquidity-providing programs as a response to the 2008 global financial crisis. The Fed's response policies were largely conducted in the form of emergency lending, spearheaded by quantitative easing.[8]In other words, the Fed's monetary policy at that time can be seen as a flexible operation of its traditional role as a lender of last resort. In contrast, the Fed's response to the COVID-19 crisis extended its role to that of a "fiscal partner" and "investor of last resort." The role of fiscal partner refers to the Fed's partnership with financial institutions to facilitate lending to the real economy, including small and medium-sized enterprises (SMEs), and to supply liquidity to local governments. The role of investor of last resort means that the Fed established programs to directly provide loans to corporations, including non-investment-grade companies.[9]Both roles represent unprecedented monetary policies adopted by the Fed. As discussed later, the total amount of support provided through the fiscal partner and investor of last resort programs activated by the Fed in 2020 exceeded that of the lender of last resort. This demonstrates the Fed's sensitive response to economic recession and employment stagnation.

Let us examine the Fed's emergency lending programs and support amounts in detail.[10]We will discuss these roles categorized as lender of last resort, fiscal partner, and investor of last resort. The total support amount for programs in 2020 was $3 trillion. First, the Fed's lender of last resort programs incurred a total cost of approximately $900 billion. Four programs were activated: MMLF (Money Market Mutual Fund Liquidity Facility) and CPFF (Commercial Paper Funding Facility) were essentially support measures to prevent liquidity-induced bankruptcies. These two programs supported borrowers in good financial standing facing temporary liquidity issues. The Fed allocated $530 billion to the MMLF and $974 million to the CPFF. The PDCF (Primary Dealer Credit Facility) provided loans to dealers registered with the New York Fed that trade US Treasury securities, with the Fed supporting $330 billion. The Fed also operated the TALF (Term ABS Loan Facility) from March 23, 2020, to September 30, 2020. TALF was a program to support financial institutions in securitizing high-quality short-term debt.

As a fiscal partner, the Fed was involved in supporting SMEs, small businesses, and local governments. The MSLP (Main Street Lending Facility) was an emergency loan program for SMEs, allowing the Fed, through a Special Purpose Vehicle (SPV), to purchase up to 95% of loans made by eligible financial institutions to SMEs. This enabled financial institutions to significantly increase lending, making it easier for SMEs to access financing. The Fed allocated $600 billion to the MSLP. For small business loan support, the Fed set aside $349 billion, primarily utilizing the Paycheck Protection Program Lending Facility (PPPLF). The MLC (Municipal Liquidity Facility) was a $500 billion support measure for local governments, where the New York Fed directly purchased bonds issued by local governments through an SPV. The total amount for fiscal partners reached approximately $1.35 trillion.

The Fed injected a total of $750 billion into its investor of last resort programs. These programs, which involved the Fed directly purchasing corporate bonds, loan securities, and Exchange Traded Funds (ETFs), are considered the most unconventional among the Fed's unconventional monetary policies. This marked the first time the Fed directly purchased corporate bonds and loan securities, not just government bonds, to supply liquidity in the market during a crisis. The investor of last resort role consisted of two programs. The PMCCF (Primary Market Corporate Credit Facility) involved the Fed directly purchasing investment-grade corporate bonds or loan securities newly issued by corporations. The SMCCF (Secondary Market Corporate Credit Facility) involved the Fed purchasing corporate bonds and related ETFs of investment-grade as well as non-investment-grade companies in the secondary market.[11]

2. The Political Economy of the Fed and the New Normal

Chapter II discussed how central banks have prioritized price stability as their core principle during the neoliberal era, and Chapter III analyzed the circumstances under which this core principle began to change with the COVID-19 crisis. If this change by the Fed is not temporary, it could be seen as the starting point for central bank monetary policy to find a balance between price stability and employment (economic growth) (Ronkaimen and Sorsa 2018). If so, will this change become a global new normal for central banks, driven by the Fed, and persist in the post-COVID era?

The possibility of a new normal for central banks in the post-COVID era is closely linked to why the Fed is maintaining its expansionary monetary policy despite concerns about inflation. The new normal for central banks can be gauged by the underlying causes of the Fed's expansionary monetary policy. Three competing hypotheses are presented below.[12]Of course, these competing hypotheses are not entirely mutually exclusive. The three hypotheses to be discussed are: a paradigm shift in economics, the political economy of financial capitalism, and the personal preferences and influence of Fed Chair Powell. Among these, the hypothesis that most strongly supports the new normal for central banks in the post-COVID era is the paradigm shift in economics, while the other two hypotheses are considered to be highly volatile depending on the political and economic situation.

First, let us examine the hypothesis of a shift in the economic paradigm.[13] There are two types of economic paradigm shift hypotheses. One is the mainstreaming of Post-Keynesian monetary theory, and the other is the influence of Modern Monetary Theory (MMT). Post-Keynesian monetary theory began to fill the void left by the decline of neoliberalism after the 2008 global financial crisis. The title of Robert Skidelsky's book, published in 2009, who is also Keynes's biographer, "Keynes: The Return of the Master," exemplifies this. The core of Post-Keynesianism is that the direction of monetary policy should support employment and economic growth, and that price management is merely one function of the central bank, not something that should always be prioritized. When the Federal Reserve made the unprecedented announcement of unlimited quantitative easing on March 24, 2020, the opening statement read, "The Federal Reserve will use all of its tools to support the U.S. economy. This will promote full employment and price stability," revealing its Post-Keynesian character (JoongAng Ilbo, March 24, 2020). Let us examine the discourse at the Federal Reserve's Jackson Hole meeting on August 27, 2021. Following warnings of inflation from various quarters, attention at this meeting was focused on the Federal Reserve's plans for tapering and interest rate hikes. This was because core inflation, excluding food and energy, had risen by 3.6% in July, the largest increase since May 1991. At this meeting, Chairman Powell stated that tapering might be possible within the year depending on economic conditions, but that interest rate hikes were not being considered at all yet. He cited the importance of employment, stating, "Unemployment has fallen to 5.4%, the lowest since the pandemic, but it is still too high. Long-term unemployment remains at high levels, and labor force participation lags far behind other employment indicators" (Korea Economic Daily, August 28, 2021).

Modern Monetary Theory posits full employment as the top priority not only for monetary policy but for all economic policies, even more so than Post-Keynesian monetary policy (Fullbrook and Morgan 2020; Kelton 2020; Wray 2015). The argument is that as long as there is no excessive inflation, the state (or central bank) with the sole right to issue currency should continuously print money and accept fiscal deficits to achieve full employment and stimulate the economy.[14] In the event of soaring inflation, the state can easily curb excess money supply by raising taxes and issuing government bonds. Although Modern Monetary Theory is considered heretical by mainstream economics, it has gained support from some members of the U.S. Democratic Party and parts of Wall Street.[15] As Modern Monetary Theory may be accepted as beneficial for employment and economic growth in the era of zero interest rates, the role and function of central banks are expected to converge towards a new normal.

Next is the hypothesis of financial capitalism's political economy. The hypothesis of financial capitalism's political economy posits a financial capital-led economic order as a typical example of classical interest group politics, where the production and distribution of goods and services serve financial capital (Piketty 2014; Polanyi 2000; Sassen 2014, 1998; Stiglitz 2020). Central banks, through both low interest rates and unconventional monetary policies, increase asset values, thereby providing the greatest benefit to financial capital. For example, the Federal Reserve's remarks on employment and unemployment are either perfunctory or, at least, not core policy objectives. Indeed, a New York Times article on July 14, 2021 ("An American Economy Only the Rich Could Love") empirically proves this. The article confirmed that low interest rates, while bringing about rapid economic growth, have also reproduced and expanded economic inequality. From March 2020, the Federal Reserve's zero interest rates and quantitative easing benefited the bottom 50 percent of Americans by only about $700 billion, while the top 1 percent of Americans accumulated over $10 trillion in wealth. This widening economic inequality between the top 1 percent and the bottom 50 percent has been a persistent phenomenon since the 2008 global financial crisis, when unconventional monetary policies were introduced, and it was amplified to historic levels during the COVID-19 pandemic. For financial capitalists, economic crises have always been opportunities to create immense new wealth, and the COVID-19 pandemic was no exception. If the hypothesis of financial capitalism's political economy is persuasive, then the new normal for central banks in the post-COVID era is somewhat difficult to expect (Jacobs and King 2018). Historically, in eras dominated by financial capitalism, employment has never been considered a core issue of the economy.

Finally, there is the hypothesis of Federal Reserve Chairman Powell's personal preference and influence. Chairman Powell has re-emerged as a "super dove" during the COVID-19 pandemic due to his strong preference for monetary easing policies. However, during his tenure as a Federal Reserve governor and in the early period as Fed Chair, Powell did not shy away from playing a hawkish role. Powell played a leading role in the Federal Reserve's decision to taper in 2013 and, in 2015, he led the Federal Reserve in raising interest rates due to rising inflation. After taking office as Fed Chair, Powell raised interest rates four times in 2018. These four interest rate hikes were widely seen as a re-emergence of Powell's hawkish disposition, given the absence of any particular inflationary signs at the time. A recent analysis suggests that Powell's "transformation" may stem from his experience with three hawkish policies he was involved in, all of which led to recessions and ultimately ended in failure (New York Times, June 18, 2021). This indicates that personal policy experience played a significant role in Powell's shift from a hawk to a dove. Separately, there is also an assessment that Powell, who became Fed Chair under the Republican Trump administration, is positioning himself as a super dove as a means to secure reappointment under a Democratic administration that favors dovish (and employment-friendly) policies. If the hypothesis of Chairman Powell's personal influence is valid, then the new normal for central banks in the post-COVID era can be considered variable. If the Democratic Party wins the midterm elections in 2022 and Powell is reappointed, we might expect a certain degree of a new normal for central banks. If either of these conditions is not met, the new normal for central banks is likely to take an unpredictable path.

IV. Conclusion

This paper focuses on the new normal of central banks as a phenomenon emerging in the post-COVID era. Moving away from neoliberal central banks that prioritize price stability, it analyzes the shift in policy direction towards balancing employment and price stability through the concept of the central bank's new normal. It provides a detailed analysis of the Federal Reserve's response to COVID-19, particularly its unconventional monetary policies, and examines the political and economic context behind the emergence of these policies. To predict the new normal of central banks in the post-COVID era, three competing hypotheses were discussed, and how each hypothesis might relate to the new normal of central banks in the post-COVID era was briefly considered.

As revealed in Chapter 2, there is a positive correlation between changes in the economic paradigm and the core policy direction of central banks. Although the legitimacy of neoliberalism has weakened since the 2008 global financial crisis, a new economic paradigm that completely replaces neoliberalism has not yet emerged. Post-Keynesianism or Modern Monetary Theory, mentioned in Chapter 3, could establish themselves as strong competing paradigms. The rise of financial capitalism, discussed in Chapter 3, also remains robust despite much criticism. In the post-COVID era, the role, function, and core direction of central banks will be called upon to change, but the scope, scale, and direction remain fluid. This is an area requiring further research.

The political economy of the new normal for central banks, unfolding on a global scale, will also impact Korea and the Bank of Korea. The balance between employment and price stability will not only redefine the role of the Bank of Korea but also necessitate the rebuilding of Korea's financial governance. This means that the relationships between the Ministry of Economy and Finance, the Financial Services Commission, the Financial Supervisory Service, and the Bank of Korea may require redefinition. Narrowing the focus to central banks alone, the Bank of Korea could passively accept the new normal for central banks, or it could proactively establish a new central banking model and play a pivotal role in the politics of global discourse. It is hoped that Korea's role as a rule-maker in global governance, a key focus of its middle-power diplomacy, can also be observed in the political economy of central banking. ■

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[1] Another piece of evidence for a "central bank liquidity economy" is the impact of the Federal Reserve's tapering (reduction or cessation of asset purchases) on financial markets. The minutes of the July Federal Open Market Committee (FOMC) meeting, held on July 27-28, 2021, were released on August 18, mentioning for the first time the possibility of tapering within the year. The mere possibility of tapering caused major stock markets, including the U.S., to experience significant adjustments over the following 3-4 days. However, when Fed governors cited the spread of the Delta variant and economic slowdown, suggesting a delay in the early implementation of tapering, U.S. and developed market stocks began a steep upward trend. No major economic indicators changed after August 18, yet the stock market fluctuated wildly. The Fed has been purchasing $120 billion in Treasury and mortgage-backed securities monthly since March 2020 as part of its quantitative easing measures. If the Fed begins tapering in an "autopilot" manner, it will reduce asset purchases by $10 billion per month, concluding the asset purchase program within 12 months.

[2] The Bank of Korea's aggregate monetary measure, M2, averaged 3,411.8 trillion won in June 2021, an increase of 6.9% from December 2020 (3,191.3 trillion won) and a surge of 17.2% (502.7 trillion won) compared to December 2019 (2,909.1 trillion won), prior to COVID-19. Yonhap News, August 20, 2021.

[3] Stanley Fischer is a prominent monetary policy expert with an academic background, having served as Deputy Managing Director of the IMF and Governor of the Bank of Israel. Fischer remains actively engaged in discussions on financial governance through various media.

[4] The average inflation targeting is a monetary policy strategy adopted by the Federal Reserve on August 27, 2020, with the core principle of maintaining an average inflation rate of 2% over the long term as the Fed's fundamental policy. If inflation falls below the 2% target for a certain period, the Fed will not raise interest rates, applying the "average 2%" principle even if inflation exceeds 2% in subsequent periods. While the concept of average inflation targeting itself may seem to seek a balance between inflation and economic conditions, the consensus is that its announcement at that particular time signaled to the market, concerned about interest rate hikes due to inflation, the Fed's firm commitment to maintaining zero interest rates in the long run. The Federal Open Market Committee (FOMC) unanimously passed the "Long-Term Goals and Monetary Policy Strategy Guidelines," including the adoption of average inflation targeting, on August 27, 2020, and Fed Chair Jerome Powell announced it at the Jackson Hole Symposium.

[5] Regarding the tolerance for inflation exceeding the 2% target, the Federal Reserve maintained the position that such price increases were temporary. In other words, the Fed identified temporary supply shortages of specific goods, such as semiconductor chips, due to the COVID-19 pandemic as the primary cause of inflation. The sharp rise in used car prices is a frequently cited example.

[6] Contrary to its etymological nuance, negative interest rates are not applied to deposits and loans of individuals or corporations.

[7] The Federal Reserve's "average inflation targeting," mentioned earlier, can be seen as providing the market with expectations of continued accommodative monetary policy. Although Chairman Powell mentioned the possibility of starting tapering within the year at the Jackson Hole Symposium on August 27, 2021, he also stated that interest rate hikes would be subject to stricter criteria, which is also part of a preemptive guidance to shape market expectations in a specific direction.

[8] Representative liquidity-providing programs included the Primary Dealer Credit Facility (PDCF), Commercial Paper Funding Facility (CPFF), Money Market Mutual Fund Liquidity Facility (MMLF), and Term Asset-Backed Securities Loan Facility (TALF). As discussed later, the Federal Reserve actively utilized these programs in response to the COVID-19 crisis.

[9] The criteria for small and medium-sized enterprises eligible for support were set at employment of less than 10,000 people and revenue below $2.5 billion. Separately, the Federal Reserve also operated a program to support micro-enterprises.

[10] The following discussion on emergency lending programs refers to Torres (2020). For other unconventional monetary policies such as quantitative easing, forward guidance, and credit policies, please refer to the preceding discussion.

[11] The CPFF, discussed earlier, is an asset purchase program by the Federal Reserve similar to the SMCCF, but it was strictly applied only to the commercial paper of the highest-rated corporations with a three-month maturity.

[12] A detailed analysis and verification of the competition hypothesis are expected to be possible from the latter half of 2022 onwards, when various research materials are anticipated to become available.

[13] For key examples of economic paradigm research, refer to Peter Hall (1989), Bruce Rodney Hall (2008), and Lepers (2018).

[14] This applies only to the fiscal and monetary policies of reserve currency countries, which cannot go bankrupt due to debt denominated in their own currency.

[15] Stephanie Kelton, a leading proponent of Modern Monetary Theory, served as a key economic advisor to Bernie Sanders.

■ Author: Yong-Ok Lee_Professor of Political Science and International Relations at Korea University. He majored in East Asian Studies at the University of Kansas and earned a Ph.D. in International Relations from the University of Southern California. His research focuses on international political economy based on constructivist theory, with key areas including East Asian financial and monetary governance, regional cooperation, the dynamics of the global monetary system (the future of the dollar system and the internationalization of the yuan), alternative world orders, and South Korea's financial diplomacy. Recent publications include "Performing Civilizational Narratives in East Asia: Asian Values, Multiple Modernities, and the Politics of Economic Development (2020)," "Socialized Soft Power: Recasting Analytical Path and Public Diplomacy (2020)," and "Relational Ontology and the Politics of Boundary-making: East Asian Financial Regionalism (2019).

■ Management and Editing: Yoon Ha-eun_EAI Research Fellow

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