On 15 December, the National Bank of Ukraine hosted the workshop Monetary Policy in Emerging Markets: Understanding the Causes and Consequences of a New Wave of Inflation. The Euro Area Business Cycle Network (EABCN) helped conduct the event for the second straight year.
The workshop convened more than 100 participants from different countries. Representatives of central banks, the academic community, international financial institutions, and think tanks from Ukraine, Italy, the United Kingdom, Switzerland, Norway, the United States, Canada, China, and other countries gave speeches during the workshop.
The participants discussed the main drivers of inflation dynamics in the world, including emerging markets. Special focus was placed on the challenges faced by central banks amid a new wave of inflation, elevated uncertainty since russia launched the full-scale war against Ukraine, geoeconomic fragmentation, and supply chain disruptions.
"It would seem that the new wave of inflation has been curbed at the global level and that central banks have coped with the task. But inflation risks remain high, driven by consumption recovery and uncertainty in commodity markets. Under such conditions, a premature switch to loosening the interest rate policy would create serious risks to the entire macroeconomic system and the economy itself.
This is why today most central banks are choosing to proceed with caution as they monitor the situation and get ready to take active measures. The National Bank of Ukraine is pursuing the same tactics," said NBU Governor Andriy Pyshnyy as he opened the workshop.
Key takeaways from what the workshop speakers had to say:
Inflation spikes are generally long-lasting. A premature celebration of victory over inflation generates risks.
Previous waves of inflation in various countries often lasted for years, said Anil Ari (IMF). Steep downtrends in inflation also took place, but inflation returned to high levels in several years’ time.
Countries that pursued consistent anti-inflationary policies managed to avoid comebacks of high inflation. Short-term losses to the economy from such policies disappeared in the medium term.
However, the risks of being plunged back into the era of rapid inflation remain very high due to uncertainty over russian aggression against Ukraine, the volatility of commodity markets, and the rerouting of trade flows and international capital movements. This is the reason it becomes increasingly important for central banks to pursue balanced policies aimed at maintaining control over inflationary processes.
High inflation poses a primary threat to the economy in the long run.
Practical experience, economic research, and modern methods of analysis are laying the groundwork for a deep understanding of inflationary processes. Central banks have the tools to conduct high-quality analyses of the underlying causes of inflation and predict inflationary processes and their consequences going forward. One of these methods uses machine-learning models, which Michele Lenza (ECB) discussed.
An in-depth analysis yields a clear insight that high inflation distorts and weighs down a country’s economic processes. This happens because of the inefficient allocation of resources, elevated uncertainty, loss of trust in the central bank, and thus a decrease in the effectiveness of its macroeconomic stabilization policy.
What is more, the economy’s ability to absorb unpredictable external shocks weakens considerably. As a result, economic cycles grow more volatile, raising uncertainty and threatening to subdue long-term economic growth, according to a finding by Efrem Castelnuovo (University of Padova, CESifo, CAMA).
Central banks should pursue consistent forward-looking policies.
Central banks around the globe, especially those of EMs, have put up a rather timely and resolute fight against the new wave of inflation. To prevent a relapse of high inflation, however, central banks should conduct consistent policies that take into account the balance of inflationary risks going forward, said Athanasios Orphanides (MIT).
Central banks’ toolkits amid major shocks must be flexible and often discretionary. But there is also something that must not change: the transparency of policies, and commitment to one’s mandate.
A video of the workshop and the speakers’ presentations is available on a special microsite.