Anatomy of a pandemic: Applying old lessons and learning from new ones

Deputy Governor Paul Beaudry describes how the lessons learned from previous economic crises helped central bankers during the global COVID‑19 pandemic. He also talks about how managing inflation expectations can help bring inflation back to target.

Spillover effects

In response to the COVID‑19 pandemic, countries around the world rolled out stimulus measures to support their national economies. Drawing on lessons from the global financial crisis of 2008–09, whereby stimulus measures were withdrawn too quickly, policymakers left stimulus in place longer to support the economic recovery from a crisis that was unlike any other.

Those fiscal and monetary policy actions supported a strong rebound in demand. But these actions ran headlong into severe supply disruptions caused by the pandemic, the war in Ukraine and other factors. Ultimately, the strong rebound in demand coupled with major supply disruptions is contributing to the high inflation we are experiencing today.

During the pandemic, countries everywhere likely did not take into consideration:

• what effects their domestic actions would have collectively on the overall global economy
• how conditions during this crisis differed from previous ones

Unusual labour market recovery

Compared with other downturns, the labour market’s recovery from the pandemic was much stronger than from previous recessions.

History has taught us that recessions that cause significant harm to the financial health of businesses, financial institutions and households are often followed by weak recoveries. During the pandemic, swift and extraordinary stimulus by governments and central banks softened the blow caused by shutdowns and job losses. Things like income supports and lower interest rates prevented the typical cycle of spending reductions that hobbled previous recoveries.

The historic bounce back in labour markets that we’ve seen during the pandemic is the result of these timely interventions.

Managing expectations to tame inflation

Since we introduced inflation targeting in 1991, the Bank has been largely successful at keeping inflation low, stable and predictable. Today, that record is being seriously tested as we emerge from the first global pandemic in a century and face the effects of Russia’s unprovoked invasion of Ukraine.

Some have suggested that policy-makers need to engineer a substantial slowdown—or even a recession—to get inflation back under control. But the best strategy for responding to high inflation needs to consider how people form their inflation expectations. If people understand and believe that the central bank will eventually bring inflation back to target, their expectations will remain “anchored.”

To achieve this, central banks must commit to a credible inflation target and communicate it clearly. In turn, this sets off a series of decisions on prices and wages that help keep inflation in line and reduces the need to create a significant economic downturn. This is the Bank’s focus.