The International Monetary Fund’s (IMF) World Economic Outlook provides in-depth analysis and projections for global economic trends, focusing on key challenges and policy responses across advanced, emerging, and developing economies. On 7 November, the Policy Center at the Leibniz Institute for Financial Research SAFE hosted, in collaboration with the Centre for Economic Policy Research (CEPR) a web seminar discussing the latest report titled "Policy Pivot, Rising Threats".
Thomas Kroen, an economist in the IMF Research Department gave insights on recent global inflation trends, monetary policy responses, and critical insights for future policymaking. The seminar was moderated by Jan Krahnen, Senior Fellow at the SAFE Policy Center.
The great tightening
Kroen’s presentation explored key questions about the global inflation surge of the past four years. He outlined how inflation reached unprecedented levels worldwide, driven by sectoral shifts and price shocks in energy and food. Although inflation is now receding, Kroen noted its persistence, particularly in the service sector. He attributed the recent inflationary episode to widespread supply bottlenecks and to energy-reliant and price-flexible sectors, with global wage growth initially lagging behind inflation and only recently catching up. Kroen outlined the monetary policy response, focusing on the widespread tightening measures adopted by central banks, with some emerging markets having acted earlier. This response is referred to in the IMF Report as the great tightening. Kroen argues that, while in most cases standard policy rules remain appropriate, in this situation, policy makers reacted reasonably: “When supply bottlenecks are relatively widespread and there is a strong demand at the same time, policy tightening can be effective.”
Comparing the recent policy responses to past inflationary episodes, Kroen argued that recent measures differ to the responses to commodity shocks in the 1970s, as the post-2020 context was notable for a looser policy stance. He suggested that recent tightening by central banks could be seen as a middle ground between resolved and unresolved inflationary episodes of the 1970s. Notably, the transmission of later tightening measures to consumer prices remained stable through the period.
Need for coordinated monetary policy decisions
Kroen emphasized the importance of a multi-country, multi-sector analysis of inflation dynamics, as well as international cooperation and targeted tightening measures to combat inflation: “Coordinated tightening expedites the disinflation process.” Kroen concluded by underscoring the need for a deeper understanding of sectoral dynamics to enhance policymakers' ability to manage inflation while mitigating output losses.
