All else equal – for a given setting of monetary policy – it was also disinflationary. Qualitatively, at least, the same thing is going on right now. Public sector debt has risen significantly, across the developed world, in response to the pandemic. But, as was the case after the financial crisis, this has not been caused by any material rise in governments’ spending on goods and services, or their direct demand for underlying economic resources. It’s because tax receipts have fallen sharply and, more materially, because governments have compensated people for the impact of mandated lockdowns. Private and aggregate demand have fallen, below the economy’s supply capacity – despite these huge transfer programmes, rates of unemployment and wider measures of spare capacity are rising. And it’s in response to these disinflationary pressures that independent central banks everywhere, including in the UK, have eased monetary policy. Anyhow, having set out at some length the points I want to make, I hope I can be reasonably concise in the body of this talk. I’ll cover first the cyclicality of interest rates under inflation targeting. Via some very simple simulations I’ll then look briefly at the impact of inflation on the public finances, focusing in particular on the effect of paying interest on central bank reserves. After an equally brief canter through some of the relevant bits of UK history there’s a short concluding section.
I mention this only because some of the commentary claims not so much that QE is potentially fuelling too much inflation, and helping governments that way, but that it’s doing so by artificially depressing the cost of new debt issuance in a manner that does not (somehow) have any impact on inflation. 9  Broadbent (2014). Note that, while the impact of QE is arguably detectable in Chart 7 – the launch in 2009, for example, in the UK and the US, and again this year – it’s not as if bond yields are (or were) otherwise static. They moved around just as much beforehand, generally downwards over this period and especially so during global downturns. They might reasonably have been expected to do so in response to the pandemic, even without QE. Nor are these changes well correlated with fiscal news. As I said earlier, a model of bond yields that has them responding only to government debt and/or QE performs poorly in the data. For more on what’s depressed long-term “neutral” interest rates, see for example, Vlieghe (2018), Broadbent (2014) and the August 2018 Inflation Report. 10 If the perceived risk were that the authorities would try to “inflate away” the debt, it would be priced into conventional bonds alone (and therefore into the “breakeven” spread between the yields on conventional and indexed debt); if people worried about formal default yields on both would be affected.