The playbook policymakers have used over the past year draws heavily from lessons learned in the aftermath of the global financial crisis (GFC). Central banks adapted unconventional programs initiated during the GFC to aggressively limit the spillover from lockdowns into funding and credit markets. Their crisis management efforts proved remarkably effective, helping set the stage for a historic global growth bounce in 2H20. However, even after this bounce, the global economy still stands roughly 4% below its pre-pandemic potential growth path as it enters 2021, with core inflation ending the year at a record-low 1.1%oya (Figure 1).

Central banks have also learned from the post-GFC expansion. Disappointing growth, below-target inflation, and a low and declining r* posed persistent challenges over the last expansion. As a result, central banks are committing more aggressively to a low-for-very-long stance through rate policy, QE, and guidance. Policy rates are anchored to the effective lower bound and asset purchases are damping long-term bond yields. Complementing these actions is forward guidance that breaks from the past in two ways. First, central banks are signaling accommodation will be in place longer than in the past, as they eschew Phillips curve-based forecasts and await inflation realizations that align with their objectives. Second, they are encouraging a modest inflation overshoot in an attempt to reverse the past decade’s slide in inflation expectations.

Facing significant slack and low inflation, central bank strategies designed to battle the challenges from the last expansion seem reasonable. But history rarely repeats and different challenges likely lie ahead. Recent shifts in fiscal policy suggest DM governments are unlikely to tighten as they did in 2011-14. In addition, financial sector drags that depressed growth in the last expansion contrast with current financial market buoyancy. As these developments interact with a gradual move toward mass vaccination, the prospects for a period of strong and sustained global growth look good.