Yeh Chia-Yu's Perspective: From QE Bailouts to Inflation Monsters – The Cost of Global Central Banks Rewriting the Monetary Textbook

Since the turn of the millennium, numerous extreme events have severely tested the best practices of global central bank monetary policy. The U.S. subprime mortgage default crisis, the global financial tsunami, and the European sovereign debt crisis completely overturned the false calm of the 'Great Moderation' era. The 'Great Moderation' refers to the period from the 1980s to the 1990s, during which many advanced economies experienced decades of low growth and low inflation. In the decade following the millennium, central banks worldwide strived to bring inflation back to a target of around two percent, or within a broader range of up to three percent. The COVID-19 pandemic triggered widespread financial system stress globally, plunging many nations into severe economic recession.

In recent years, Russia’s invasion of Ukraine has directly disrupted political and economic stability in Eastern Europe and caused energy shortages. Additionally, recurring military conflicts between Israel and Iran, Lebanon, Hamas, Palestine, and other actors in the Middle East—these rare and extreme geopolitical events have directly led to the largest, most widespread, and longest-lasting global inflation seen in half a century. Due to severe liquidity shortages, several banks on both sides of the Atlantic faced credit crunches and short-term collapse risks.

Central banks around the world have actively responded to these challenges by introducing practical measures to address macroeconomic volatility and financial system stress. These include large-scale asset purchase programs under unconventional quantitative easing (QE) monetary policy, negative and zero interest rates, macroprudential financial stress tests, stricter Basel liquidity capital regulations, additional leverage restrictions for international banks and insurance firms, and enhanced deposit insurance thresholds—all aimed at ensuring the stable development of the global financial system. These monetary and financial stability measures have positively supported efforts to moderately limit indirect collateral damage to the real economy.

In the post-pandemic era, central banks have gradually initiated interest rate hiking cycles. Inflation rates in advanced and emerging market economies have steadily declined back into the broad target range below three percent. Despite facing rare and extreme negative shocks—including geopolitical tensions, wars, banking collapses, and the rampant spread of the coronavirus—the labor markets of countries worldwide have demonstrated notable resilience.

These exceptional events have triggered profound macroeconomic implications for the practice of global central bank monetary policy. Prior to the outbreak of the COVID-19 crisis, monetary policy rates in many advanced economies had already reached historical lows near the zero lower bound. In some countries, particularly in Europe and Japan, policy rates even dipped into negative territory. In advanced economies, the scale of central bank balance sheets under quantitative easing had reached unprecedented highs. In recent years, global government debt has continued to rise, placing national governments under historically unprecedented fiscal and budgetary pressures.

Moreover, non-economic structural factors such as climate change, global warming, economic damages from extreme weather, aging societies due to increased life expectancy, global macroeconomic fluctuations, geopolitical risks, reverse financial integration, and green energy transitions continue to intensify the complexity of global monetary policy.

A retrospective analysis of the current global monetary policy framework can be reasonably divided into two major phases: first, the 2008–2009 global financial crisis and its subsequent international macroeconomic fallout; second, the 2020–2023 COVID-19 pandemic crisis and the ensuing chain reaction of global economic recession. These extreme events have fundamentally reshaped emergency responses in central bank monetary policy. The global financial crisis precisely marked the historical end of the 'Great Moderation'—a prolonged period of stable economic growth during which many regions maintained low but steady GDP growth alongside price stability with low inflation.

However, beneath this calm surface of low growth and low inflation, financial market stresses from real estate and consumer credit lending continued to accumulate across many regions worldwide. Moreover, low interest rates further amplified the prevailing trend of global credit expansion. Many central banks deliberately eased monetary policy in response to the U.S. dot-com bubble burst and the 9/11 terrorist attacks. After unsustainable global credit expansion and soaring asset prices, the 2008–2009 global financial crisis plunged numerous financial markets into the worst international economic downturn since the 1930s Great Depression.

During the global financial crisis, U.S. investment bank Lehman Brothers ultimately filed for bankruptcy protection. Other institutions, such as Bear Stearns and AIG, also faced financial distress. Countless financial institutions worldwide teetered on the brink of collapse. International money markets froze abruptly, and asset prices for equities, bonds, and other instruments plummeted rapidly.

Following the 2008–2009 global financial crisis, certain central banks implemented strong and robust unconventional monetary policy emergency measures. They sharply cut policy rates to near-zero levels while launching large-scale asset purchase programs under quantitative easing, rapidly expanding their balance sheets. These central banks provided timely short-term liquidity support to major global banks, insurers, and other non-bank financial institutions. In the early stages of the crisis, they played the critical role of lender of last resort within the international financial system.

Between 2010 and 2014, global economic recovery remained weak and sluggish, with persistently low inflation across nations. Many central banks faced widespread concerns over new forms of deflation. They again adopted strong unconventional monetary policy responses—cutting interest rates to the zero lower bound. The European Central Bank (ECB) and the Bank of Japan even rapidly lowered their policy rates into negative territory. Advanced-economy central banks continued using prior QE asset purchase programs, rapidly expanding their balance sheets in an active attempt to accelerate global economic recovery.

From late 2019 to mid-2023, the sudden onset of the COVID-19 pandemic abruptly halted the nascent normalization of global monetary policy. As governments worldwide responded aggressively to this rare public health disaster, central banks once again slashed policy rates to zero or negative levels to urgently contain recession risks and financial asset volatility. Specific central banks launched large-scale asset purchase programs focused on government bonds, providing targeted short-term liquidity subsidies to key banks. Consequently, the economic scale of several central banks’ balance sheets surged to historic highs.

Between 2008 and 2023, multiple central banks expanded their balance sheets dramatically through QE asset purchase programs. The Federal Reserve System’s balance sheet grew to nearly $9 trillion. The ECB’s QE program expanded to over $6 trillion. During the same period, the Bank of Japan expanded its balance sheet to over $4 trillion, while the Bank of England raised its to over $1 trillion. Given the increasing frequency of rare geopolitical events and climate disasters in recent years, many macroeconomists and experts assess that central banks worldwide may increasingly incorporate QE asset purchase programs into their standard emergency toolkit for conventional monetary policy.

After the easing of the pandemic crisis, the global economy began a gradual recovery. However, central banks suddenly faced new inflationary pressures. In many regions, inflation and rising prices are broadly recognized as monetary phenomena. In the early post-pandemic phase, inflation rates in numerous countries surged into double digits. Yet, global trade supply chains failed to provide robust and flexible responses to the novel fiscal and monetary coordination policies introduced after the pandemic.

Although the global economy is gradually recovering, this recovery is directly influencing macro demand trends and technological industry shifts. Leading tech firms worldwide are actively investing in AI-driven high-speed cloud services and advanced wearable devices—such as TSMC’s semiconductor chips and advanced packaging technologies, NVIDIA’s graphics processing units, Google and Meta’s smart glasses for the metaverse, SpaceX and Blue Origin’s low-orbit satellites and rocket constellations, and Apple and Microsoft’s smartphones and tablets.

As the pandemic neared its end, Russia’s surprise invasion of Ukraine occurred, followed by repeated military clashes in the Middle East between Israel and opposing forces including Iran, Lebanon, Hamas, and Palestine. These sudden international geopolitical events directly triggered a macroeconomic trend of surging global energy and consumer goods prices, significantly exacerbating global inflation—especially the sharp volatility in oil and natural gas prices in Eastern Europe and the Middle East.

How have central banks responded to these new global inflationary pressures in the post-pandemic era? Since then, many central banks have synchronously initiated gradual interest rate hiking cycles to moderately counteract inflation. Following these hikes, certain central banks have implemented large-scale asset sales programs—quantitative tightening (QT) of government bonds—to drastically reduce the size of their balance sheets, aiming to appropriately return monetary policy to a normal trajectory. Recently, amid ongoing macro trends, central banks have actively responded to geopolitical events such as the Russia-Ukraine war in Eastern Europe and Middle Eastern military conflicts, seeking to moderate global cross-border exchange rates and capital flows.