CL (08/2023) Policymaking in an age of shifts and breaks Flashcards
What are the three major shifts in the global economy since the pandemic?
What are the three major shifts in the global economy since the pandemic?
- Profound changes in the labour market and the nature of work, including tight labour markets, fewer working hours, increased remote working, and the impact of digitalisation and generative AI.
- An energy transition, with transformations in global energy markets and a shift towards renewables.
- A deepening geopolitical divide and a global economy fragmenting into competing blocs, accompanied by rising protectionism and changes in trade patterns.
How have these shifts contributed to the rise in inflation over the last two years? Is it clear whether these shifts will be permanent?
These shifts have restricted aggregate supply while directing demand towards sectors with capacity constraints, contributing to the steep rise in inflation. This was compounded by mismatches arising against the backdrop of expansionary macroeconomic policies implemented to offset the effects of the pandemic, necessitating rapid policy adjustments by central banks.
It is not clear at this stage if these shifts will be permanent, but their effects have been more persistent than initially expected, raising questions about the nature of key economic relationships.
What are the implications of reshoring and friend-shoring for supply constraints?
Reshoring and friend-shoring imply new supply constraints, potentially leading to a decline in real imports globally by up to 30% if world trade fragments along geopolitical lines. This could happen before the domestic supply base is rebuilt.
How will higher structural investment needs impact the economic outlook? How are economic shocks expected to transmit through the economy in the new environment?
Higher structural investment needs, driven by needs in energy transition, digital transformation, and defense spending, will make the economic outlook harder to read. This is evidenced by the rise in investment in the euro area amid stagnant output.
The new environment will likely lead to larger relative price shocks, especially in commodities crucial for green technologies. Central banks will need to keep inflation expectations anchored while these price adjustments occur.
What changes in price- and wage-setting behavior have been observed since the pandemic?
Firms have adjusted their pricing strategies, becoming more likely to raise prices substantially. Additionally, the tight labor market has empowered workers to seek higher wages to recoup real wage losses, potentially leading to more persistent inflation.
What are the three key elements for robust policymaking in an age of shifts and breaks?
- Clarity on the objective and commitment to delivering it.
- Flexibility in analysis, avoiding reliance on simple rules or outdated models.
- Humility, acknowledging the limits of current knowledge and policy capabilities.
How does flexibility in policy analysis aid central banks in uncertain economies?
Flexibility allows central banks to construct policy frameworks that capture the complexity they face and hedge against it. This includes not relying solely on old data or models, and blending staff inflation projections, underlying inflation trends, and effectiveness of policy measures.
What role does humility play in central bank policymaking in the current environment?
Humility involves recognizing the limits of what is known and what monetary policy can achieve. It’s important for maintaining credibility with the public by communicating about the future in a way that captures the uncertainty faced.
How is the ECB adapting its forecasting process to the new environment?
The ECB is publishing sensitivity analyses of key variables like energy prices and wages, using scenario analysis, and being more transparent in accounting for forecast errors. They are also explaining the main factors behind inflation forecast errors and intend to continue this practice.
In conclusion, what is essential for policymaking in an age of shifts and breaks?
Policymaking requires an open mind, a willingness to adjust analytical frameworks in real-time to new developments, and ensuring price stability in line with mandates. Central banks must be clear in their objectives, flexible in analysis, and humble in communication.
