the postcrisis response of regulation coincided with the greater use of quantitative easing. But it is nonetheless helpful to separate them analytically. A decade ago there would have been reason to think that the monetary policy need for increased central bank balance sheets would be shorter term, while the financial stability See “The central bank balance sheet as a policy tool: past, present and future”, by Andrew Bailey, Jonathan Bridges, Richard Harrison, Josh Jones and Aakash Mankodi. Available here. 1  2  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  2  demand would be permanent. That distinction still stands, but the structural drivers of low equilibrium interest rates suggest the use of central bank balance sheets for monetary policy will be more long-lived than had been anticipated. Expansion of central bank balance sheets in response to Covid  Turning to the more recent period, the financial stability and monetary policy drivers of central bank balance sheet expansion were again deeply intertwined. Central banks faced an incipient financial stability shock together with a need for monetary policy to respond to an unprecedented – in scale and speed – economic downturn. But the financial stability emergency differed from previous such events. The problem originated not primarily in the banking system, but in the non-bank sector – among funds, traders and corporates themselves. Central banks activated their traditional tools to inject liquidity into the banks via repo operations, and these played an important part in stabilising conditions.
These challenges lie less in the types of things that can be captured in a financial ratio or balance sheet, or in changes to the risk premiums attached to the financial claims on the country. They lie more in the realm of improving how markets work and how efficiently resources are allocated. These factors include the development of the types of institutions that are the subject of DeSoto's work or the reports. They involve the development of the legal system and World Bank's Doing Business its ability to ensure that property rights can be established and that the protections they engender can be enforced. They are about creating the conditions for more competitive domestic financial and product markets by reducing barriers to starting and building a business, and by building better transportation, power and telecommunications infrastructure. And they are about broadening access to and improving the quality of public education. Allowing competitive pressures to operate is undoubtedly the best way to foster the investment, innovation and risk-taking that is central to raising an economy's long-run sustainable growth rate. But markets can't solve all problems, and they don't always function perfectly. This means that the policy imperative isn't simply to reduce regulation; it is to improve the design of the regulations that are important to dealing with market failures. Finally, future growth outcomes will depend importantly on the success of governments in fostering the development of the domestic financial system.