Global challenges emerging from the new economic reality – The Diplomat Bucharest
“In the international economic and financial environment, the echoes of the latest discussions between the representatives of the main central banks of the developed countries, during the annual event organized by the American Federal Reserve in Jackson Hole, are still strong. The main elements that have caught the eye are related to the determination of the European Central Bank and the Federal Reserve to take measures aimed at moderating inflation and bringing it, over time, close to the objective.
The firm tone of the statements met market expectations and continues to make the front pages of specialized publications, being the favorite subject of comments and opinions from economic analysts. However, I do not think this should come as a surprise to anyone, for many reasons which have been discussed at length previously: the need to strengthen the credibility of central banks, the developments and the information available over the last quarters which have clearly demonstrated the persistent character inflation as opposed to the expectations that could be formulated on the basis of previously available data, the risk of falling expectations and the growing observation of their harmful effects on the functioning of the economy, etc.
Therefore, I will not refer to these statements, but rather try to bring to the fore, very briefly, several other nuances of the opinions expressed by renowned economists and certain global concerns reiterated in the statements of the last few days which do not did not make the headlines, but which, in essence, are at least as important for our future and for the entire international community, both from an economic and financial point of view and from a social point of view. They are complementary to the Jackson Hole headlines and have at least as high a medium-term importance.
From this point of view, it should be noted first of all that the speeches of the main central bankers continued to lack elements of firm and clear “forward guidance”. In my view, this shows that most central bankers remain cautious and anchor themselves in firm targets for the future level of benchmark interest rates. I take this approach as confirmation that central banks remain keenly aware of the high level of unpredictability in the short to medium term, which argues for the current preference for a “see and do” approach depending on what the data will show and information that will be available in the next period regarding the evolution of the economy and prices.
At the same time, many economists point out that the approach of monetary policy in the fight against inflation must be different according to the particularities of each economy. The most important differentiation is between the situation in the United States and that of the euro zone, but the differences are just as important between the developed and emerging economies. While in the United States, the current economic situation and the structure of price dynamics show that the increase in the monetary policy interest rate could act quite effectively to curb price increases in the medium term, in the euro area, the close link between inflation and factors beyond the influence of classical monetary policy instruments (such as energy prices) probably implies, at least from a theoretical point of view, a smaller magnitude of the increase overall monetary policy interest rate.
Important from the perspective of emerging economies (as is our case), but which has implications for global financial stability, is that recent actions by central banks in developed economies come after a considerable period of time. during which central banks in developing economies have already significantly increased local benchmark interest rates in many steps. This fact is less mentioned by financial analysts, but it is of crucial importance to prevent a global financial crisis. So, while central bankers in developed economies are often accused of being late (like those in emerging economies), the fact that emerging economies had time to tighten monetary policy significantly before central bank moves developed economies is a big win for the world. stability, especially since the time available to the emerging economies was sufficient even for interest rate increases to be gradual, and therefore easier to absorb locally. A recent reference in this sense was made by the head of the Bank for International Settlements, Augustin Carsten, who said that central banks must have a realistic approach to the effectiveness of policies aimed at influencing short-term demand to combat against inflation in the current economic climate. the context.
Another important concern of the last period that emerges from the speeches of economists in recent days, if only sometimes between the lines, is that of the need to rethink the current economic models which are essentially based on the principle of dynamic equilibrium and that of rational expectations. Nobel Prize-winning economist Joseph Stiglitz remarked last week that these models are less likely to be useful in calibrating economic policies now and in the near future, since we are in a situation of obvious imbalances that are likely to continue at least in the medium term, and further supply shocks are very likely in the coming years, as long as geopolitical tensions persist.
As we know, the state of equilibrium is a theoretical concept. There are always dynamic forces that keep an economy from reaching and maintaining that equilibrium position, and realistically we are always in a state of disequilibrium that tends towards theoretical equilibrium. However, there may be certain situations where the imbalance becomes more pronounced. Commonly used and established economic theory suggests that all markets work towards market equilibrium, where supply and demand reach an equilibrium and there is no overproduction or underproduction. It is clear that such balances are difficult to achieve in an economic environment that will remain dominated by uncertainty and high risks for the foreseeable future and will probably continue to be affected by new external shocks. That is why it would be useful to study some models based on the permanent adaptation of economic agents to new changing realities in the context of a prolonged state of disequilibrium, in conditions where their anticipations and forecasts lack precision due to incomplete information available. Joseph Stiglitz also notes that in such a conceptual framework, policies aimed at increasing the flexibility of the economy and its ability to adapt quickly to new conditions are of particular importance, especially with regard to the supply of productive resources. and the offer in general. In this context, the flexibility of the labor market is also of great importance, as well as the mechanisms of automatic stabilizers already enshrined in the theory and practice of public policies.
The above principles are broadly supported by recent statements by another Nobel laureate in economics, Lars Peter Hansen, who advocates a greater role for fiscal policy in stabilizing the economy and combating inflation, as well as to rethink the economic forecasting models used in political decisions. In an article co-published with Michael Barnett and William Brock, they argue for the connection of economic and climate models, given the clear two-way link between economic and environmental sustainability, and the influences of both on social well-being.
The brief enumeration above presents just a few of the fundamental concerns of economists today, but with profound local implications for all global economies. Some of them are not new at all, for example reiterating the important role of fiscal policy in complementarity with monetary policy and structural reforms to combat the negative effects of the overlapping crises we are currently facing, but also to transform the economy by adapting to new realities. The need to rethink the analytical and forecasting models used to calibrate the policies mentioned is not new either, but it is increasingly important in the context of imbalances and exogenous shocks that are expected to persist for a significant period. in the future. Digital transformation, climate challenges, the fight against inequalities and the promotion of social equity have been on the agenda of decision-makers for a very long time, but the sharpening of these major externalities of the current crises makes them an increasingly acute priority. . All of these fundamental concerns remain prominent and will continue to form the background to any discussion of specific policy decisions.