Managing global liquidity through COVID-19 and beyond

A combination of pre-existing and new measures have helped avert a systemic liquidity crisis to date. International cooperation and further policy innovation will be needed to ensure continued stability.
Chatham House briefing Published 26 February 2021 Updated 29 March 2021 ISBN: 978 1 78413 452 5
Photo illustration of banknotes

Isabelle Mateos y Lago

Managing Director, Global Head of the Official Institutions Group, BlackRock

This briefing, which is published under the Global Economy and Finance Programme’s ‘Rebuilding International Economic Cooperation’ project, explores how policy responses to the COVID-19 economic shock have thus far prevented a systemic, global liquidity crunch. It outlines several policy areas that could benefit from international cooperation as the economic challenges associated with the pandemic evolve, and presents four recommendations for action.

When the pandemic erupted in 2020, policymakers successfully reused and, in some cases, scaled up emergency measures from the 2008 global financial crisis. There were also significant policy innovations, including a widening of the scope of US quantitative easing (QE), the introduction of domestic QE in emerging markets, and G20-sponsored debt service relief for poor countries. 

To ensure continued financial stability and prepare economies for a very different post-COVID-19 future, the next steps should include: (i) new allocations of IMF Special Drawing Rights (SDRs), potentially using a multilateral trust to recycle SDRs to countries most in need; (ii) the development of a more complete and transparent framework for sovereign debt restructurings; (iii) the establishment of a best-practice ‘playbook’ for eventual policy normalization; and (iv) structural initiatives to deepen capital markets in developing economies, including support for impact bond issuance.