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Series of economic shocks with global consequences | IMF |

Russia's invasion of Ukraine is an unmitigated catastrophe for global peace and particularly for peace in Europe. But the war also greatly compounds a number of preexisting adverse global economic trends, including rising inflation, extreme poverty, increasing food insecurity, deglobalization, and worsening environmental degradation.

Returning to inflation, there is a strong case to be made that globalization is the secret sauce that made the job of bringing down inflation immensely easier in the 1990s and 2000s, so that deglobalization could easily exacerbate upward inflation pressures for an extended period. Recently, Charles Goodhart and Manoj Pradhan forcefully argued that adverse demographics in east Asia and eastern Europe will persistently increase global price pressures, just as the rise of China has been a disinflationary force. I made a similar argument in my 2003 Jackson Hole conference paper, "Globalization and Global Disinflation," saying that while the advent of central bank independence helped, it cannot be given all the credit for the decline in inflation in the 1980s and 1990s.

Perhaps the most important macroeconomic lesson today is that in crafting responses to the latest major macroeconomic shock, whether it be the financial crisis, the pandemic, or now war in Europe, policymakers (not to mention academic economists) must remember that although things usually get better after a catastrophic shock, they can also get much worse. Thus monetary and fiscal policy need to incorporate resilience, and not just the maximalism that has become fashionable of late.

'Sapere aude'
by Oui (Oui) on Fri Jul 22nd, 2022 at 04:36:02 AM EST

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