Looking to the Future: Monetary Policy in Uncharted Waters

By providing vast monetary easing at the advent of the COVID-19 pandemic, central banks cushioned the blow to the economy, and by facilitating the financing of an essential fiscal expansion, they prevented a financial market meltdown. Under normal times, unprecedented money printing of such extent would be alarming as the power of central bank balance sheets, when misused, can immensely destabilize the economy. However, the recovery has been sluggish. This conclusion focuses on the recent crises, namely, the global financial crisis, the Eurozone sovereign debt crisis, the pandemic crisis, and the energy crisis triggered by the war in Ukraine. Considerable uncertainty remains, particularly relating to the assessment of economic slack. A key element of central banks’ policy frameworks is the Phillips curve relationship describing a trade-off between low slack and high inflation, and alternative approaches to understanding the inflation process may consider monetary aggregates as potential predictors of inflation. To avoid an economic slowdown beyond what is needed to bring inflation under control, central banks should coordinate. Amid an environment of monetary policy conduct in uncharted waters where uncertainties have significantly heightened, policymakers in their quest to fight inflation effectively need to eliminate, whenever possible, surprises in both monetary and fiscal policies.