Economic consequences of the pandemic have caused extraordinary dynamics not only in the macroeconomic environment but also for central banking activities.

Disruption in productivity due to COVID-19, which has severely hit domestic economies, has forced governments and authorities to take distinct and swift measures to fight the effect of the pandemic on the economy and the financial sector. While many governments have undertaken such an approach, the “joint venture” between monetary and fiscal policy has earned the spotlight.

In the European Union, a recent verdict from the German Constitutional Court relates to such a “monetary-fiscal policy” scheme. The court ruled that a prior decision by the Court of Justice of the EU was beyond the court’s powers, effectively placing more judicial scrutiny on public sector asset purchase programs through which the European Central Bank is monetarily financing the EU.

The Indonesian government had its breakthrough in the “fiscal-monetary policy mix” by issuing Regulation in Lieu of Law (Perppu) No. 1/ 2020, yet it somehow changes the dynamics. The question is whether Bank Indonesia (BI) should print money to stimulate the economy and regain the growth momentum as if there was no pandemic.

On May 6, BI Governor Perry Warjiyo stated that BI would not print money as an immediate option to rescue the economy. He maintains the view that printing money would contradict best practices on prescribing monetary policies prudently. The word “prudent” should be highlighted here.

While central bankers are often urged not to be so naive about the conflicting interests between monetary and fiscal policies especially during this pandemic, “quantitative easing” should not be straightly interpreted as dropping “helicopter money” on the economy. Monetary policy and fiscal policy differ in both the approach as well as the expected results. Until now, BI has engaged in quantitative easing programs with an approximate total of Rp 503.8 trillion (US$33.50 billion) through open market operations, foreign currency swaps and the reduction of banking reserve requirements (GWM).

Amid the recent macroeconomic challenges, those measures are probably appropriate to address the economic impacts of COVID-19 in Indonesia.

Although some monetary economists in the United States have started to see that reliance on the “printing press” to increase the US dollar in circulation might be the answer for their macroeconomic problems ever since the 2008 crisis, it should be the last solution for the Indonesian economy. Indonesia, with its rather inflationary economic structure, which is still highly dependent on private consumption, is quite different from the Wall Street-based economy with the exorbitant privilege on its US dollar. The money printing solution might be suitable for an economy that has suffered prolonged deflationary pressure. Moreover, printing money would worsen the moral hazard.

The intense debate on whether monetary financing by the central bank, or printing money, is a necessary and appropriate measure for COVID-19 represents some convincing evidence that the relativity of central banking activities is being tested.

Thanks to the COVID-19 outbreak, it is truly happening. We should see now that central banking activities are, or at least should be, far from an unchangeable tyranny. On the contrary, central banking serves very dynamic social beings.

The orthodox fashion of central banking is now out of date. As central banking is built upon the virtue of law, the tagline on Cornell Law School’s moot courtroom is nothing but true here: “law must be stable and yet it cannot stand still.”

However, any necessary adjustment taken in the central banking-related world should be tied to a due process of law and top-flight deliberations to ensure its consistency with the goal, which is nothing other than stability.

Not to stop soon after the virus disappears, careful evaluations on each variation and the probability to restore central banking practices to its status quo should always be in the policymakers’ minds. Theories, principles, past experiences and recent dynamics might help us draw as well as to safeguard the integrity of central banking practices on its path of relativity.

Ultimately, any interpretation on how central banking ought to be shaped should not be left to which would be the one with less hassle, but toward a more favorable light to the goal of central banking, again, which is to achieve and maintain stability.

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Staff member in legal affairs department, Bank Indonesia. The views are personal.

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