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A Game of Circles: The Disparities Between COVID-19 and the Financial Crisis

Updated: Dec 30, 2022

The fallout of the Financial Crisis and the COVID-19 pandemic differ significantly. The Financial Crisis aftermath was one characterised by low inflation rates with GDP taking up to eight years to recover. (ONS, 2018a) In contrast, after the pandemic, the UK economy has and is experiencing record high rates of inflation. These disparities have strangely manifested despite a comparable monetary rollout by the Bank of England. In both historic cases, the Bank of England engaged in expansionary monetary policy by reducing interest rates and introducing Quantitative Easing programmes. This poses the question, how has the same policy approach yielded drastically different outcomes? To help answer this problem, the following column will examine the different impacts of the Financial Crisis and COVID-19 pandemic on the UK’s financial and industrial circulation. Once these differences are established, we will then discuss how such disparities led to two contrasting inflationary outcomes derived from expansionary monetary measures. When looking at the Financial Crisis in the UK, it is found that a financial contagion spread to the British economy from the US as the subprime mortgage crash led to a significant devaluation of assets such as housing. (Figure 1) As such, this contagion spread throughout the financial circulation, yielding an overall loss of confidence within the banking and financial sector. (House of Commons Treasury Committee, 2009) Yet, the problem spread to the industrial circulation. With UK banks having little liquidity, the willingness for financial firms to supply credit to the rest of the economy fell. (Riley, Rosazza-Bondibene and Young, 2014) Moreover, the demand for loans from consumers decreased as unemployment rates rose. (Figure 2) At the same time, lower valuations and falling demand from unemployed consumers meant that firms were less likely to take out new loans and agents with existing debts were at higher risk. A reduction in GDP followed (ONS, 2018b) and inflation rates fell. (Figure 3) This prompted a monetary response from the Bank of England of a reduction in the base interest rate and QE (Quantitative Easing) to steer inflation rates closer to target. (Deleidi and Mazzucato, 2018) Yet, despite this intervention, the creation of money by institutions did not accelerate. (Figure 4) Financial firms were unwilling to lend due to the low confidence in the financial sector and low demand from the industrial circulation. As such, central banks failed to increase M4 (the supply of money broadly defined) growth, making monetary policy ineffective at increasing inflation at the time.

Unlike the Financial Crisis, the pandemics contagion originated within the industrial circulation as lockdown measures drastically reduced aggregate supply and demand levels. With this, the Bank of England forecasted that the pandemic would be disinflationary. (Bank of England, 2020a) As such, similarly to the Financial Crisis, QE measures paired with interest rate cuts were implemented. (Bank of England, 2021) (Bank of England, 2020b) However, the outcomes of these policies were drastically different for two reasons. First, the rollout of fiscal support in the form of Furlough ensured that labour markets were protected during the pandemic. (Powell, Francis-Devine and Clark, 2021) Second, with the pandemic first originating in industrial circulation rather than the financial one, the lack of confidence that occurred during the Financial Crisis in the financial system did not manifest. Granted, the significant impact of COVID on the real economy did yield devaluations in assets, yet, this was only temporary as the announcement of fiscal support meant that forward-looking markets recovered quickly. (Wearden, 2021) Hence a more secure financial sector was willing to supply debt as the creation of private money was made easier due to loose monetary measures. Moreover, with the industrial circulation having recovered due to fiscal stimulus, there was existing demand for debt, increasing aggregate demand. Consequently, despite policymakers introducing similar monetary measures in both crises, the contrasts in the causes of these events have made the outcomes of the same approach severely different with monetary policy being inflationary during the pandemic. (IIMR, 2021)



Bank of England (2020a). Monetary Policy Committee Monetary Policy Report. [online] Available at:

Bank of England (2020b). Quantitative Easing. [online] Available at:

Bank of England (2021). Our Response to Coronavirus (Covid-19). [online] Available at:

Deleidi, M. and Mazzucato, M. (2018). The Effectiveness and Impact of post-2008 UK Monetary Policy Quantitative Easing: the Theory. [online] Available at:

IIMR (2021). IIMR February 2021: 'Why didn’t QE Spark Inflation after 2009 and what’s Different now?'. T. Congdon. [online] Available at:

ONS (2018a). The 2008 Recession 10 Years on - Office for National Statistics. [online] Available at:

ONS (2018b). The 2008 Recession 10 Years on - Office for National Statistics. [online] Available at:

Powell, A., Francis-Devine, B. and Clark, H. (2021). Coronavirus Job Retention Scheme: Statistics. [online] Available at:

Riley, R., Rosazza-Bondibene, C. and Young, G. (2014). The Financial Crisis, Bank Lending and UK Productivity: Sectoral and Firm-Level Evidence. National Institute Economic Review, 228(1), pp.R17–R34. doi:10.1177/002795011422800103.

Wearden, G. (2021). FTSE 100 Hits 22-month High as Shares Recover Covid Crisis Losses – as It Happened. [online] The Guardian. Available at:




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