Asset Purchases and Direct Financing: Guiding Principles for Emerging Markets and Developing Economies during COVID–19 and Beyond by Tobias Adrian, Christopher J. Erceg, Simon T Gray, Ratna Sahay published by IMF (2021).
“Many central banks in emerging market and developing economies have used asset purchases to reduce financial stresses during the COVID crisis, and some are doing so to provide macroeconomic stimulus.
Many central banks in emerging market and developing economies (EMDEs) have used asset purchases to reduce financial stresses during the COVID-19 crisis, and some are doing so to provide macroeconomic stimulus. While such programs may be beneficial, they also raise concerns about heightened risks of fiscal dominance and debt monetization. A key question is whether these programs are appropriate for EMDEs and, if so, how to design them to minimize risks to central bank independence and price stability.
Drawing on lessons from past episodes of fiscal dominance, asset purchase programs should be based on several key principles. First, the central bank must have operational independence to adjust its policy rate as needed to achieve its objectives. Second, it should make asset purchases on its own initiative, and at market prices. And third, it must be able to adjust the scale of purchases (or sales) as warranted for achieving its objectives. There should also be a strong preference toward purchases in the secondary market to avoid the many risks associated with direct financing…”
