Annual Research Conference: Policy Panel – The Global Economy: Old Trade-offs and New Challenges

hello hello good morning everyone can I ask to take care of the seeds please uh we are about to start with the

policy

panel

okay I think we are just missing better okay we are about to start we are just missing Maury hello He is so let me give you welcome everyone to the

policy

panel

. My name is Pioli Gouache. I am the economic advisor here in the background and I would moderate this panel. The issue is the

global

economy

, all the

trade

-

offs

and new

challenges

, I think. It is fair to say that we are facing a very complex and challenging

global

microeconomic situation at the moment.

The panel's title suggests that some of the

challenges

are long-standing, for example inflation, which is reaching levels we haven't seen in four decades in advanced economies. either the strength of the US dollar, which is putting a lot of pressure on emerging market economies and approaching levels last seen in the mid-1980s, at the time of the plaza agreement, or sustainability issues, which are are becoming a key issue for many low-income countries. of income and border or the energy crisis that is taking a serious toll on energy-dependent economies, especially European economies that are heavily dependent on Russian gas supplies, so there is a feeling that some of the The problems we face are taking us back to the 1980s or even the 1970s, but some of the challenges we face are also newer, such as the climate transition whose effects on the global

economy

are being increasingly felt or the risk of geoeconomic fragmentation in general from deglobalization with the world. turning inward and possibly into separate blocks, this is something that we consider an existential challenge for us here at the bottom or the increasing importance of non-bank financial institutions and the risks to global financial stability that this could create, something that was illustrated yesterday in Linda Goldberg's excellent Mundel Fleming lecture.

In this environment, I think the job of our policy panel is done for us and fortunately we have a great group of panelists, so let me briefly introduce Jason Furman and to his left is Aetna Professor of the Practice of Economic Policy at the Kennedy School from Harvard and the Department of Economics at Harvard University, works on a wide range of topics relevant to policymakers, including US and international microeconomics, tax policy, labor markets, competition policy, and was President Obama's top economic advisor. as chief economist and cabinet member and is now a nonresident senior fellow at the Peterson Institute.

Phil Lane, along with Jason, is a member of the executive board of the European Central Bank and chief economist of the ECB before joining the ECB. Phil was Governor of the Central Bank of Ireland and has worked on a wide range of issues relating to financial globalisation, the macroeconomics of exchange rates and capital flows, micro economic policy design and European monetary integration. Now Carmen, to my common right, Reinhardt is the Minos Stompanakis Professor of International Financial System at the Harvard Kennedy School from 2020 to 2022 he served as Senior Vice President and Chief Economist at the World Bank Group and was Chief Economist at the Bank of Investments in the 1980s, she is also a policy advisor and deputy director of the IMF and a member of the advisory panel of the Federal Reserve Bank of New York and the panel of economic advisors of the Congressional budget office, among others, Carmen, for Of course, it is Carmen's work that has helped us understand the financial crisis in both advanced economies and emerging markets, now finally together with Carmen.

Furthermore, Yupsfeld needs no introduction since the

conference

is in his honor, but let me say two words: Professor of Economics at the University of Berkeley in 1958 in 2014-2015, he was a member of President Obama's Council of Economic Advisors, I think worked with Jason there and From 2015 to 2018, he had my current job as chief economist at the IMF. Now, as we have already mentioned several times, Mori is the most prominent academic in international macroeconomics and has worked on a wide range of topics related to the global economy, so let's leave it at that. Now I give you some of the ground rules for our panel, first to each of the panelists in the order I just listed them.

I'll give opening remarks for up to 10 minutes and keep track of time pretty strictly, then we'll have some time. for the panelists to exchange views, followed by a question from the audience and then I'll turn it over to Mori for any final comments. Now Jason will focus on the US economy, the risk of a recession, the current challenges for monetary policy, Phil will focus on the Eurozone how to formulate monetary policy when facing a serious terms of

trade

shock how should Fiscal policy accompany monetary policy? Carmen will focus on emerging markets and the specific challenges they face Rising interest rates Low growth High energy prices A strong dollar and finally Mori will simply offer his views on all of these questions.

Let me start with Jason, so I'll skip to here. I feel very honored to be here, I learned a lot during the year I spent as a colleague of Maurice and us. As newly non-resident colleagues at the Peterson Institute for International Economics over the past two years, I have seen a lot of economic commentary that I would describe as possibilism in the past year, the argument that there would be no inflation if the multiplier were possible. is low, the pandemic may not have damaged supply chains and will therefore be at full potential. The wage increases we are seeing may not translate into price increases.

Anchored inflation expectations are likely to keep inflation anchored in the short run and In the long run, I think each of those statements wasn't completely crazy in their own right, but taken together they were probably a description of the 85th percentile or even the 85th percentile. 99 happy results, not 50th percentile. I feel like I'm still seeing that. I now read prominent economists and economic commentators who talk about a soft landing using words like it is not unthinkable that we have a self-landing where there is a narrow path to a soft landing and then they spend all their comments elucidating and explaining what is not unthinkable or path narrow which to me sounds like the 85th percentile, not the center of the distribution, the types of assumptions now are that job openings and resignations can fall without the unemployment rate rising, it has never happened before doesn't mean it can happen now, but again, is it? in the middle of the distribution that wage growth will slow and that will translate into slower price growth that long-term inflation expectations that are anchored matter and short-term expectations that are too high don't mean that some prices will go down like housing or some inflation rates will fall as a refuge, but others will not go the other way, like the unusually slow pace of medical and financial services in the PCE will not reverse when I look at all that again, it seems possible , but it's not like that.

I feel probable, so when I think about it I try to put approximate probabilities. I have this Matrix in my head. We can argue and debate whether these are the appropriate words for those numbers, but regardless, we can take any set of numbers that are mutually exclusive. and come up with four probabilities that if they add up to 100 can't be said to be definitely wrong, so I look at something like this and say as soft a landing as possible. I put a probability of 13. I put that. 13 opportunity and I define self-landing in this very specific way unemployment rate below four and a half percent inflation rate in the second half of the year below three I think there is a lot of inertia in the wage price process that the Labor markets remain tighter than at any time before the pandemic, that there is not much room for margin compression, this is another shoe to drop.

I think the hard landing is a good chance of a recession next year, but historically recessions have brought inflation. lowered the rate by half a point to a point where they haven't reduced it completely to two or even necessarily below three if we look at plausible sacrifice ratios or other ways of calibrating it, you know, without an unemployment rate of around of six and a half percent for two years. I wouldn't bet on the inflation rate being much below three. There is a lot of weight in a scenario of continued overheating in which we don't actually have a recession and I'm not quite sure why everyone is so sure that we are going to have a recession with consumption balances as healthy as they are with momentum and labor market that will continue to be as strong as it is, so a world where we will be in almost the same situation again next year maybe will be a little better now It seems quite plausible to me and then the plurality of probabilities that I put on something which I call stagflation or I think it's more likely an incomplete hard landing where there is a recession that reduces the inflation rate, it just doesn't reduce it completely to where we would like you to be happy to argue about these probabilities, they are a little better than ago two weeks.

I tried not to get carried away by yesterday's CPI report like the financial markets did. I'll try not to get carried away by yesterday's CPI report. The next time there's a bad CPI report you get as depressed as the financial markets do, but you always want to stick with what you're thinking. So what should the Federal Reserve be doing right now? I think they are more or less correct. Ideally, what would make me nervous is if financial conditions were easing a lot, and in some respects the last day made me nervous because we had a huge discontinuous easing of financial conditions, on top of what had happened over the last week or so.

Two, while some was probably appropriate given the updated wages number last week, the productivity number last week in the CPI, this week overall, there's no reason I think the FED should continue at 75 basis points. , going down to 50, even going down to 25. That would be fine with me, but if I were caught in a very dovish direction and financial conditions fell, that would make me more nervous partly because I think that, based on this diagnosis of the economy, it is more likely that you need stricter rather than more flexible financial conditions. conditions and I'd rather not let them ease up and then have to undo that and watch them adjust better to smooth things out down the road.

I want to address two concerns that people have expressed that I think are quite reasonable: one is the delays and the other. policy could overshoot, um, let me tell you, I think it's very unlikely that we'll end up in a world where the inflation rate next year is below two percent or even below two and a half percent, if that were to happen. , so I think x- post I would say that the FED certainly did too much, that would be a sufficient condition, not a necessary condition to say that they did too much. I think it is unlikely that they will overdo it.

I think it's possible we can bring in the labor. market to neru and just let the fact that we don't have a unit root in the inflation process eventually bring our inflation back to expected inflation. I'm not an incredibly doctrinaire believer in rational expectations, but if a process takes several years and systematically puts your inflation above your expected inflation at some point. I'm not going to trust that your expected inflation will stay anchored that way and in that sense, the idea that you can just wait and let anchored expectations do the work. work rather than letting any slack in the labor market do the work.

I think it's again possible, but it wouldn't be what I would describe as probable, so you know there are costs of errors in both directions, but the cost of inflation becoming unanchored means your sacrifice ratio goes down. from something like zero, which is where inflation expectations are anchored, something that could easily be above 10 points per year of unemployment for every point of inflation, the second problem is that things are breaking down in the financial system of the global economy and let me say that I think central banks have a terrible track record of trying to understand these problems, anticipate them and do something preventative about them through their monetary policy.

I was never a fan of monetary policy acting preemptively to burst bubbles and, similarly, I am not a fan of monetary policy. Do now the opposite of not doing something for them preventively, there are examples. I think we were too timid in our response to the crisisIn part because of concerns about financial instability, the best way to reduce those financial risks would be to use more fiscal policy. and have more fiscal contraction to take some of the pressure off of monetary policy, we wouldn't need rates that high then, we're not that optimistic that we're going to achieve that in the United States, so I think the FED just needs to keep raising rates. rates and if a problem arises try to solve it with a mechanism without changing monetary policy and if you need to change monetary policy you can always do that, but the idea of ​​trying to preemptively predict things that we have a terrible track record of doing is not something which I think should occupy a very important place in monetary policy and that applies even more to the impact of the dollar on the global economy, which I think has been underestimated in several aspects.

I think the FED, like all central banks, has done it. take care largely of its mandate, which is the US economy, and if problems develop, those problems are more likely to be dealt with by AI, the IMF, by the Treasury, by others and by other policies, in instead of the Federal Reserve adjusting the path of its interest rates. to anything other than what is necessary for your mandate of employment and pricing thank you thank you Jason exactly on time very good opening for a very similar set of topics I am sure Phil will want to discuss good morning and it was an honor to be invited to participate in the

conference

of

research

, especially in honor of Maury, I mean really from my point of view, for two reasons, one is that Moria has written some really fundamental articles about the euro and the European Monetary Union, for 25 years, and that is very appreciated and secondly, the areas of the year are an economy very open to global forces that I will come back to this presentation and so the international macro is really the core of how we have to think about the euro zone now, such once a little settled in the difference.

I'm going to focus more on a few. of the analytical problems that we face in understanding the dynamics of inflation and the role of fiscal policy and some of these problems instead of concentrating on the next interest rate decision, so if you expect me to announce what the next decision on what interest rate should be I'm not going to do that, so maybe some of you will leave right now, but that's okay, so maybe you guys know that a helpful way to get some perspective is to think about the things. compared to pre-pandemic, the beginning of these graphs is the fourth quarter of 2019. and the left side shows the inflation rate how it has evolved over time and then, but it's also useful, not just to think about the inflation rate but also in the price. level because, of course, in terms of the cost of living, etc., the cumulative impact on the price level is very important, which is sometimes obscured when you just look at inflation rates, which are basically this month compared with 12 months ago, so what do you see?

This, you know, really, from summer '21 onwards, this March rise in the inflation rate, but what you also see in the European context is that you know that initially there is a very large direct contribution from energy and there is still a fairly large direct contribution is 42 in the October figure, which is much larger than yesterday's contribution in the US, the very large contribution from Food, but what is also true is that the core has actually been recovered and, you know, just below four percent now, I'll come back to that topic, so if you want, in terms of, you know, the kind of pattern that you see in the price level on the right side compares with the pre-pandemic level at which the energy price level has disappeared. increased by 60 percent and your food price level is going to buy 17, so this is obviously within the general inflation rate. very large router price movements now you could say well, well, uh, let's look through the energy, let's look at the core and of course the problem is With core inflation, I mean all sectors, when there is an increase of 60% in the route price of energies between approximately five and ten percent of the input costs for different sectors, so the industry, to some extent, will have to increase prices even in these main categories they are purely and simply due to the energy shock, on top of that, absolutely with the reopening of the European economy, especially from March of this year, if you remember around this time last year and the initial month of 22, Europe was quite locked down again.

So the reopening actually happened there in March and April of this year, but then it's been quite significant, again in the October numbers, hotel prices are up 21 on the year, airfares are up 33 on the year, so that this is something that probably happened early in. the US data, but basically there is quite a bit now in the European data, so the point I want to make that is essentially on the left side is the San Francisco Fed technique for supply demand decomposition , where you see that there is a significant signal from the supply component with the The demand component has been increasing this year, but, of course, within that demand component, the open question is whether there is a kind of effect of reopening is only going to stabilize or whether this is basically going to be more persistent and then when you think about Again, the question of the influence that trickles down from energy prices and other categories, whether it's commodity inflation, what We call non-energy industrial goods, it is assumed that it is only inflation of goods and services, you can see the role that sectors that have many energy inputs have had.

Much higher price increases than in other sectors. I don't show it here, but as a contrast, if we focus on those services that are basically very labor intensive, there is not much inflation because in Europe it remains that way until now. Inflation per peso is quite a bit. limited, so when you look sector by sector you are attracted to these are sectors where you consume a lot of energy or these are sectors where the effect of reopening restaurants hotels fast food those are the type of sectors where again there has been a great price increases, for what another way of saying this is that in some ways the core is not the core because there are non-core elements leaking into the core right now and again, in terms of that demand component, you can look at this graph and say : wow, there's a really big increase in demand this year um and this only goes to the third quarter if you add the second quarter.

I must say that if you have the third quarter there is more of that, so there has been a big increase in consumption this year, but again in terms of levels it is a lot, you know, still only approaching pre-pandemic levels, Of course, that's affecting tight supply, so it's contributing to inflation, but as supply bottlenecks ease, you can imagine that at least some of the rebalancing will be on the supply side. Well, let me address some open economy issues which again are it's going to be different over the year in the area down for the US, so on this chart, again, it's simpler to roll up from pre-pandemic to now. and what you see here is that kind of red box that is energy, the increase in the energy import bill is 3.3 percent of GDP, so it is a big impact in terms of trade.

Now you have to be a bit universal because, of course, Europe produces many manufactured products that benefit from the increase. prices around the world, so there has also been an increase in export prices, so our net terms of trade have decreased by 1.8 percentage points of GDP, so let's round up to two, two percent of GDP is a big impact in terms of the typical breadth of an economic cycle, um, but you know it's important to look at it holistically rather than just from the import side and what you see, one of the consequences is this tendency to the decline in the trade balance, you know, with a significant contribution from the increase in the energy import bill there is a large reduction in energy demand this year, but it is still that way in the end, it is still an inelastic basic sphere, so the price increase increases the import bill and then it is also projecting into the behavior of exchange rates, so, you know, the IMF, of course, is the home of many equilibrium exchange rate models , but this is a version of an equilibrium exchange rate model, where in addition to the real factors we had some normal factors and basically in terms of the depreciation of the year 19 against the dollar from the beginning of 21, eight percentage points in this calculation is the terms of trade, so you can imagine if there is a reverse movement in the terms of trade that could support the novel and the exchange rate, uh, now. then when it comes to policy issues, fiscal policy, this is our um, from our own survey you can see the big difference between the bottom quintile groups and the top quintile groups in terms of their exposure to either energy or transport connection, so it is This is quite obvious from a macro point of view, unless you support those lower quintile groups, there will be a very large drop in consumption.

These are people with high marginal propensities to consume above the basic equity rate. Reasons why you would want to support those. groups, but you can also look at that graph and say, well, you know, if I go to the top quintile groups and the cases are much weaker, for them they generalize their support. Well, one of the topics I talk about is the differences in inflation rates. throughout the U area and of course the most basic point here is a fairly strong connection between the basket waves, so the energy food basket rate in the hiccups will be higher in low-income member countries and what you see here.

Is this a huge difference between the Baltic countries in the upper right quadrant and other countries and basically a lot of progress is made by correlating with the very basic spending percentage? Also, these are countries where the pass-through is much faster than they are price takers in many sectors and therefore there is also less of a managed pricing kind of culture, so some of the ways in which prices are rising more slowly in other places are not true. Let me also say the way it's probably going to be some kind of major reversal, you know, this is what happened in 22 under the vertical axis, what happened in 21 under the horizontal axis, okay, the Baltics have been hit twice.

High inflation this year and last. year eh, but if I rule out some of those countries, you will see a negative correlation and I like to use the example of Spain because Spain was early in allowing energy prices to appear in retail prices and that inflation rate is lower than others countries where there were basically long-term contracts, other reasons to slow it down and this is seen here in electricity prices since July 21. You know some countries like Spain and now the Netherlands, where there has been a huge increase. across other countries has not yet reached that point, so what we think of the ECB passing on to retail prices is not over, so even if there is a reversal in wholesale prices, the impact on retail prices the energy in our September forecast still continues after We're still quite a while away, okay, let me finish with a fiscal report and the commission, this morning, presented new projections, so what you see here with the debt ratios is that it captures the gradual increase with the pandemic, but also captures it as if it were you.

We know this so far and it is forecast to continue over the next two years as a significant reversal in debt runs due to the strong recovery and, you know, the effects of deflators etc., and then if you look behind this in terms of AD. deficits what has happened this year has been a large reduction in fiscal deficits in Europe with the strong recovery in income and the end of all types of pandemic supports, but basically what is true and what the commission projects will be true for the next few years is that's kind of a stagnation now so the deficits will stagnate rather than shrink more narrowly so the commission today was estimating about one percentage point of GDP this year in energy supports and again if They stick to their plan that these are temporary measures.

Next year it will be about another percentage point or so and this will be one of the big fiscal questions: how to manage the transition from this year's policies to policies that are more targeted and that have actually allowed for a significant period . of a delayed adjustment um if these if energy prices remain high, the reality is that more of this will have to happen to many homes and that's whywe would always say uh aimed at temporary measures rather than universal measures, but certainly later in the discussion we will have more time for some of these issues, but I should stop there, thank you Phil Carmen, well, it's a real pleasure to be here and I'm going to save my memories of Mori for my lunch comments, so I will. um, just kind of follow the Mandate that that pure Olivier talked about earlier and he'll talk about the various aspects of emerging market debt risks. um.

I will start with good news and then deteriorate. many around here live in fear of a repeat of the 1980s, which I think looms large, you know, the repeat where we saw, not just low-income countries, because when we say emerging markets we have to realize that we are covering and covering a There is a lot of ground and there are already problems in low-income and frontier economies that are different from those in middle-income countries. So the crisis of the 1980s engulfed low-income and middle- to upper-middle-income countries. And I'll come back to this. was very long and it's an understatement to say it was a lost decade, actually it was for many countries especially low income ones, it was closer to Luke, two lost decades, so we're not there yet, that's good news, um.

And let me also explain a little bit why we are not there, typically, if we look at the long period of history, a long period of history, when we see large waves of defaults, the global factors that accompany them are at least three. The recurring ones, one is the emergence of a marked increase in international interest rates, another is a reversal of capital flows towards emerging markets and the third is a drop in raw material prices, a large contraction and a commodity crisis, those are a kind of three shoes that fall. fell in the 1980s big fell in the 1930s big, all three haven't fallen yet, so you know, commodity prices, I haven't seen the drama, certainly, if we had it, and It's interesting because in the last 30 years we haven't seen the three shoes crash in 2015, which was a very bad year for emerging markets. 2000 and in fact marked a turning point that I'm going to allude to, in a minute, in 2015, you had. a drop in commodity prices was the end of the China and commodities super cycle, this is when China's growth rate slowed uh and there was a major reversal in capital flows, especially commodity producers premiums, but there was a benign interest rate environment uh now the tables have changed and it's two factors: the increase in interest rates, uh, it's the reversal where we've gone from a long period not too long because 2020 definitely was risk free. 2020 actually saw the biggest in the spring of 2020, we had the biggest reversal. in the capital flows that I've seen since the 1930s, from the data that's available for the 1930s in emerging markets, uh, but we went from risk to de-risking, so we've had the flow reversal of capital, we are seeing rice in the international interest. interest rates means that the preconditions are in place for a very broad-based emerging market crisis.

I will say that the good news again is that we have seen only two of the three prerequisites; Furthermore, I would say that the increase in interest rates that we are seeing is slight compared to the very significant in the case of the 1980s and nominal and real interest rates and in the case of the 1930s in interest rates. real interest rates because deflation was so great in the 1930s that there was a spike in real interest rates. real interest rates and we're not there, so that's good news and like I said, I'll deteriorate as I go.

The other part of the good news is that if you look at external debt, over a long time series. On a fundamental basis, the share of short-term debt is not as high as it was in periods of high vulnerability, including the period before the debt crisis of the 1980s, and we know that refinancing risk is a big driver of debt crises. That comment I just made has to be very cautious because we may not have a record level of external debt in the short term, but the variable rate debt is very high in the SME and, therefore, the transfer of higher interests .

The rates are about to be fast, in addition, we have a lot of internal debt and, unfortunately, this is so. It will be interesting how this plays out because much of the domestic debt issued during Covid is short-term and market-tied. rates, so, it is, it is, it is, it is, it is, a variable rate by nature, now, now, these, but, the composition of the external debt remains relatively favorable and now, what?, now we are going downhill, uh, which is not good news and I'm going to answer Pierre Olivia's questions. More granularly, what is not good news is that in addition to rising interest rates, in addition to avoiding risk taking and a reversal, we also have a very strong dollar which, of course, increases the burden of servicing the debt for countries. who have debt in dollars and do not forget that the large debts contracted with China are also overwhelmingly denominated in US dollars, so the external debt is in serious dollars, that is a big inconvenience, another big inconvenience that is very different from the consequences from the global financial crisis uh when the United States when Europe went into recession during the global financial crisis and it was a long, drawn out recession uh China was growing very rapidly and this was a big growth driver for emerging markets because, as you know, it stimulated trade held, like I said, come on, China's commodity cycle was very long, uh, and it was significantly driven by the fact that between the early 2000s and around 2013, the average growth Chinese was double digits, um, purely, how much do I have just because I'm prone?

I digress, so I just want to make sure that China will not be that growth engine this time and also, when I talk about capital flow reversals and Guillermo Cabo cowboy style sudden stops, we have a new type of sudden stop, which It is the net lending of China, which was a major lender to low-income countries, especially low-income countries, there are middle-income countries like Ecuador, like Venezuela, which had also had Sri Lanka, they were all doing very well. and anyway, but the fact is that reversals come in two forms: they come from market forces, but they also come from the reduction of net borrowing, Christoph Travis Sebastian Horn and I actually did a recent post on the sidebar about that. effect that shows that China's net flows have become negative, which is important also because many of those bad debts, many of those loans have gone into the category of bad debts and this I will move on to the question of, are we really talking of a broader-based debt crisis I would say that it is not a hypothetical situation for low-income countries where we are already in a very serious situation, because if you look at the 74 countries that were eligible for the suspension initiative of debt service, more than 60 percent of low-income countries are now in debt distress or at high risk of debt distress.

Debt problems are already very real. I think the biggest difference so far has been that emerging markets and upper middle incomes haven't been hit by the wave in the way that we certainly saw in that domino effect in the early 1980s. I'll conclude on the concerns What do I have about the existing debt problem that is so common among low-income people and the concerns about whether debt problems manifest themselves in middle-income countries and what continues to worry me and I talked about this when I gave the conference Mondel Fleming a couple of years ago here is that we still lack architecture, we have the common framework that was introduced by the G20 apparently to graduate, you know, to wean countries from the debt service suspension initiative, which was a temporary relief from cash flow and dealing with debt overhang and write-downs that we haven't seen, not a single write-down that we haven't seen. a single debt restructuring so far Chad, which was the first country to introduce it, is now considered a success not because they restructured it but because oil prices went up, so now they don't need a debt restructuring, so that the great concern and the great challenge that I have What I see going forward is that, much like the 1980s, all the big players and this is not just China, it is also the G7.

I think they are taking a wait-and-see attitude and not really thinking about what kind of debt restructuring will be necessary for countries that are low-income countries, many low-income countries that are already in debt, or middle-income countries that can be in difficulties, so on that uplifting note I will end on foreign affairs, thank you Carmen, thank you very much, let's turn. To Mori, okay, this may be my only chance to thank everyone for coming to this and, you know, I know Pierre Olivier will offer a more detailed thank you at the end, but just to thank the bottom, MD Gita Piero.

Olivier from the IMF Economic Review and Andre for organizing this and it's been really great. It is also particularly rewarding to be on this panel, given the participants. Carmen was a student at Columbia when I began my career. Philip was at Harvard and he's not my student, but we actually communicated via email when he was a graduate student. He emailed me out of the blue and it's been great to watch them evolve into really influential

research

ers and policymakers. Jason is even younger than me than they are. He was my cea boss, I learned a lot from him in terms of economics and since of course he was one of the first people to worry that the US fiscal stimulus being implemented in early 2021 would lead to the inflationary result it has, but whatever I don't know about Jason and what I learned from him that was most valuable was how to be a manager.

Jason is an incredible manager and an incredible leader and at cea I carefully observed his skills and the way he built community and many times. During my tenure as research director I asked myself, what would Jason do, how would I handle this and I couldn't really do it as well as he did, but I think he helped me tremendously, so thank you for that. I did it well, great, as it has been. noted for the first time in 40 years, I am at a high level of global inflation, it is a real challenge, it is really a global mega shock and it is a dominant factor driving monetary policies.

In today's world, among central banks, almost all of which have been raising interest rates at an almost unprecedented pace, it is the actions of the Federal Reserve that have the most consequences for the global economy, so we have to analyze them very carefully and this was the case for 40 years. It's true again um globally this is what inflation has done this is data from Heber for the advanced and emerging economies and it goes through September from September Global inflation had not begun to decline in fact it increased globally in that month and despite the data that was just released for the US.

US inflation is still high and core inflation is still high and it is this surgeon on US inflation that It was probably anticipated by markets at some level before many economists anticipated it, which has been boosting the dollar. the dollar rose first, the expectation that the FED would have to adjust its policies before other major central banks and now the real adjustment and the continued strength of the US economy against what the FED has done continues and will likely continue to boost the dollar . Even higher, conducting monetary policy in this context of a once-in-40-year mega shock that was largely unexpected is very challenging.

Jay Powell in Jackson Hole a couple of years ago talked about sailing by the stars and if you think about it, it's really difficult right now, first of all, it highlights the natural rate, where is the post-pandemic? There is a lot of uncertainty about it, we don't know if it is below four percent, if it is more like four and a half or five percent. For the US, our star may be even more problematic. We need to know the expected inflation rate at some level or some measure of expectations to know where our star is relative to the natural rate, but expectations depend on what the central bank is. is doing and is expected to do if the Central Bank analyzes inflation survey data and expectations are lower and concludes that the real market interest rate is too high and loosens, which could cause inflation expectations inflation arise if there is little credibility, then how can we do?

In fact, implementing themonetary policy is not really simple and it may be, and this relates to the concern about financial conditions that Jason raised and Linda talked about yesterday that our star, the way we generally define it, is not really a sufficient statistic to Uh, what? Carmen mentioned the 1980s and I find it useful to think about what happened then and what happened now. There are significant differences between the current world and the first. of everything that is happening now is after decades, literally decades, literally, more than a generation of low inflation which was not the case in the early 1980s, there was a buildup over a dozen years or more of pressures inflationary problems that were largely unaddressed until Paul Volcker began to address them as well, the world is more financially complex, much more complex than it was then, much more indebted both publicly and by the private sector, and much more globally integrated , especially in terms of finance, the world is more closely united, uh, these.

Some factors worsen some of the credibility problems facing monetary policy. Something we've been talking about more recently is the financial domain. You already know the idea that concerns about breaking something in financial markets can hinder central banks in addressing inflation problems and This was discussed most recently in the context of the United Kingdom, where the Bank of England is apparently reversing its quantitative adjustment to deal with disruptions in the unions. The fiscal dominance of the market is still an issue and unlike the kind of luxury we had before the pandemic. years in which, and even during much of the pandemic, when fiscal and monetary policies were working together, they may be working at odds in the future and that will also raise credibility issues, but I think the economic risks of disinflation They are also older and that is something related to the credibility problems um uh the world is not linear as we like to work with linear models as economists but the world is not linear and particularly in financial markets there can be worrying nonlinearities um and in fact uh uh tipping points that could emerge again in opaque markets, the UK provides an example of that risk Olivia in a recent tweet I think laid out the situation we are in, pretty well, focused on delays and monetary policy, the idea that if you had complete information, if they were completely credible, it might be optimal to start adjusting before stopping adjusting before inflation started to go down and he highlighted the credibility risk that that would increase and I think his points really show that there is an important trade.

I mean there is a risk of going too far in terms of damaging the economy. There is a risk to credibility. Again, this is the difficulty of really judging how the markets are processing what you as a central bank are doing and using that to forecast the future and you have to negotiate this, the policymaker has to negotiate this and he concluded this tweet by saying no. There is an easy answer and I think this is definitely true, so we all have to come to our assessments of where we are. I would judge that further policy adjustment is needed going forward, you know, as Carmen said, interest rates are not really at such a high level compared to past contraction cycles and certainly not compared to inflation worldwide that has not begun to arrive.

On the other hand, uh, uh, I think central bankers have to be more attentive than usual to what's happening abroad, to actions and reactions abroad, because the global economy is an integrated system for the United States. In the US, the newspaper is more closed. that John Luca presented yesterday Illustrated, you know, this very interesting fact influences what the overall result will be, but anyway I think there could be maybe unknowns, unknowns out there and communication is a challenge, but my opinion would be that, um, credibility. It may not be as big a problem as we fear, given that central banks, albeit belatedly, have gotten the message and have begun to act and communicate their objectives more effectively.

I think we should start worrying, at least not about turning , but to worry about at least some of the unintended consequences that may arise. I say this in the context of a global economy that is much more fragile and much closer to tipping points in several ways and Olivier Pure alluded to almost all of these at the beginning and you, as a background, have been working on this, so just I will mention this. There are certainly financial risks, but there are other tipping point risks. near some very worrying tipping points, melting permafrost, Arctic permafrost, the effects of melting glaciers on climate patterns, these are things that may not be easily reversible and could have macroeconomic consequences, not to mention monetary policy has to be loosened because we are worried about climate change, but when we think about the global situation and things that could happen, it is good to keep this in mind covid health Illustrated an important turning point a microbe something that probably evolved by evolution random um I don't want to get into The lab leak issues change the world permanently, changed the world permanently and there are other health risks that we haven't really begun to look at politically.

Polarization creates political tipping points. You have a choice. Change things possibly permanently. It can change your institutions in ways that can be very difficult to address geopolitics. Similarly, Russia's invasion of Ukraine can be a geopolitical turning point that fragments the world for a long time, so we want to build a more resilient world. , we need more cooperation in all of these dimensions. I have mentioned them but they are scarce. You know, my last message, therefore, will be. This illustrates to me why it is so important to have institutions like this that can talk to all the actors who can recommend the right policies.

They may not listen right away, but it's important to be out there with the bright ideas and the right messages. Thank you, thank you Maury, very sobering but also very insightful comments. Let me hand it back to you, maybe first to the panelists in case you want to. I would like to react to each one's presentations. I can also ask some questions if you want, but I thought maybe there would be different views on monetary policy, obviously, between Jason and Maury, so Jason, if you want to start, I want to talk about my management skills, go ahead, please.

Please, yes, I mean the delays, Mori, I mean, I agree that it is something impossible when they are long and variable to understand. I would make two points, although one is that the Federal Reserve has not actually tightened monetary policy. in the last two months and have no plan to tighten monetary policy if you measure monetary policy by financial conditions and what is ultimately affecting the economy to a large extent, what they are doing is following the path they already They telegraphed, if anything, more of a moderate path than the second thing I would say is that if your rule is that you are going to wait until inflation reaches two and you are going to continue adjusting until inflation reaches two, then you are guaranteed to overshoot .

If your rule is that you know core inflation has been at five percent and you're going to start waiting for core inflation to drop to four percent, you're not guaranteed any kind of excess and I think we're closer to that. second world than we are for the first world and in that sense I believe that current monetary policy is much more sensible and symmetrical than a year ago, the explicit rule of the Federal Reserve was that we would not increase interest rates to 25 basis points until We are already at maximum employment, which guaranteed an excess that maybe made sense in the beginning, but when we went overboard to maintain that excess, I think in retrospect it doesn't look so good, this is not a rule like that.

I'm not saying we have to get there, so I guess I'm a little less worried about delays, although we may both be arguing against the same thing. I'm not in favor of surprising everyone at the December meeting. face dramatically tight financial conditions with 100 basis point federal funds, right? I don't disagree with that I don't disagree with that um Let me maybe continue with a question to Phil um I mean, I was struck by your figure on the actual exchange of a difference in inflation rates and different euro countries. which translates into differences in real exchange rates obviously and a large part of this seems to me to also come indirectly from the fiscal measures that have been implemented in some countries versus others and trying to deal with the energy crisis.

I mean, you would think that the low inflation in Spain relative to some of the Baltic countries or even France comes from very generous price caps that have been protecting some of the households, so I'm not feeding the CPI, so it's clearly a situation where fiscal policy at the national level starts to have an impact on inflation, obviously that's something that's part of the core mandate of the ECB, so how do you see that? Yeah, I mean, I think there are several levels. to that, so, I mean, if we focus on the direct interventions to set the retail price and the advantage, I mean, I think everyone can agree on the ideal scheme, if they are going to do it, it means that above of something quite low level of consumption above that level, the price mechanism should be there to send a signal, so design schemes, which is true in different countries, B could argue where the problem is, you could argue that maybe it should be, it should be pushed there. the price at which you or the level of consumption at which you pay the market price, so I think there is an element, there is an element, going back to Temporal, which is, I mean, one thing that everyone is learning is that the Utility pricing strategies I know it's quite difficult for these companies to figure it out now.

Basically, I pass the wholesale price very quickly, which is true in some countries. Which are the? Know? If I sign a long-term contract, I will do it. I face the bilateral risk of setting a price too high or a price too low and then obviously if a while ago you set up a long-term contract where your costs have gone up a lot and now when you have the opportunity to go down uh, you know, it's very much kind of uh, major economics, these non-linear leaps, but let me move on to some of the core themes that you know of margin politics, one is uh, I mean, Jason already said it, but I want to say that it is a commonplace and we all believe. to some extent, which is, uh, experience influences information expectations, so if inflation has spiked, then in terms of I'm not so sure that it necessarily matters for long-term inflation expectations. , see maybe eventually the center, as he said.

We'll go back to two, but in terms of if you say right with this inflation rate, I know that not only I but everyone else in the economy will be looking for significant wage increases next year, then the year after that, and the two years after that. The expected inflation over the next three years could be significant, so if there are countries where they have basically suppressed inflation at this point, I think there will be some sort of relief from the pressure of the second round, so that's a plus, The question is: can they do it? marry what still retains the price signal and then the third element is the financing, so basically you can, uh, if it is temporarily targeted, be able to have the intervention, so the European Commission calculated today that in the aggregate area the amount of energy intervention this year is about one percentage point of GDP, so if it is fully deficit financed, you know it will have an impact in terms of overall demand.

Dynamics, however, there are tax increases that could be considered, let me mention that. Fiscally, the connection between fiscal and inflation there is a huge rotation fiscally towards transfers, so if transfers have a lower multiplier, because those who had some extra money, you know, they can just increase your savings instead of spending it, the multiplier is the same. fiscal deficit of a lower multiplier if you have rotated from government consumption and investment towards transfers, so you know, I think all of this, you know, needs a lot of consideration, but what I would say is maybe fundamentally for Europe because those levels are as different as I showed, I mean, the commission that everyone has in the Eurogroup is clear, everything has to be anchored in debt ratios with slopedownward and it's very important to make sure that you know the temporal interventions that have temporal objectives and are consistent with the downward trend and have a more downward slope for those with high deaths and you know these are things that are easy to say, but Implementing them will be very important not only next year but in the years to come.

Thanks Phillip, comment, let me move on to "Jason says the FED is right, they should raise rates, the dollar appreciates, it's not directly the FED's problem, they can consider the spillover effects, but emerging market economies should approach it with your own instruments, any reaction, so look, I think we can." I kept it in mind and one of Phil's slides clearly highlighted that this rise in inflation is a regressive tax, and the relative price swings we've seen tilted towards food and energy have made this rise in inflation a particularly regressive shock after greed, which was a regressive shock. shock, so emerging markets also have very good reasons to deal with their inflation problems, apart from thinking about macro stabilization, inflation rises, food crises and more, this is imported, in the context of instability and the geopolitical dimension.

You see that at the country level as well in Emerging Markets, you know, there's no nice, elegant way out of inflation, but they have to address their own inflation problems even though this can I mean, and I alluded to to this in my comments, a pretty substantial fiscal hit for those that issued a lot of short-term debt during the greed crisis and that's a long list of countries and lastly, I would say that you know, um uh uh . With respect to the strengthening of the dollar, they are caught in a very situation. I don't envy central bankers anywhere right now, but I know that certainly in the emerging markets space, if you follow the dollar at this stage, you may be tempted to do it because you inflate, you're worried about higher inflation, uh, happen if you let your currency go, which makes the inflation situation if you follow the dollar, you face another risk, has anyone noticed that China's currency has been depreciating very significantly, which was also a precursor to the The Asian crisis, when they unified their currency in January 1994, meant that many of the emerging market currencies became overvalued, so it is difficult to decide what to do with the dollar, but my feeling is that they are going to adjust it, but not No, not this.

This is not a general statement. Look at Eastern Europe and Latin America and you will see very different policy responses, very quickly. I think that monetary policy already has two objectives in a single instrument, so I would not add more objectives in the United States. Although I want to say that you listen to Carmen, we should be much more aggressive about debt relief, especially for the poorest countries, and support the IMF, both in its multilateral and other efforts, so there are a lot of things that we should do, but we shouldn't load everything on a single instrument in a single institution.

To try to do all those things, I forgot that when I talk about the inflation differential, it was to do two basis points, one by one, not one by one, but to a certain extent, in wage inflation differentials and therefore , in the changes. competitiveness and that can have very persistent effects, so I think that is happening, but there is a second classic channel in a marginal Union which is the real interest rate. Channel that is known with the same policy rate if the inflation differential you know those countries with high inflation and you know that it will be persistent to a certain point, you could say well, if I have a super negative real interest rate, you know that will support the demand, it will invite more credit creation, all that, that channel is probably quite weak because these are countries where uncertainty is very high, not exactly the circumstances under which I think people are taking advantage of super low real rates, so I would say the competitiveness channel is there, but I'm not so sure that the really interesting channel is super powerful right now.

Very good, thanks Phil. More, you won't. I just have one question, um, uh, one more thing for Jason and Phillip, which is, um, you know, this whole discussion, uh, uh, that. that kind of debate arose in 2021 about inflation, a debate that was upended by the invasion of Ukraine and you know, some of those effects on commodity prices were, perhaps, possibly temporary, but it certainly gave a Philip to inflation and probably to inflation expectations in a number of countries, uh, you know more persistently in Europe than in the US and I wonder in your assessment, you know?

Do you know what your counterfactual would be about where we would be without that? I'm not sure it's interesting. It's a question for political purposes, but in terms of assessing the adequacy of policies before the invasion, do you know where you think we would be now? I can take it off. I think there has been an exaggeration of the degree of transmission of commodity prices. to core inflation, um, there are two effects, one is direct, the price of oil goes up, so the price of jet fuel goes up, so the price of air tickets goes up, or I would call it mechanical, there is also a behavioral effect that goes in the opposite direction, that is, you can no longer pay for gas, so you spend all your money on gas and you no longer go to restaurants and you get less inflation in restaurants, according to previous research that attempted to quantify these two effects . you know, the type of network of them could be a little positive, it could be a little negative, but it's not dramatic and just to give a kind of review of that, in 2005 we saw over a 12 month period that the prices of the energy rose 36 percent.

In the United States, core inflation during that period was 1.9 over the past 12 months. Energy prices are up 18 percent in the United States, half the increase we saw in 2005, and core inflation is up six percent, so we would have had very high core inflation. inflation even without now the additional inflation on top of that, you know, going up to nine, that was definitely in The Invasion, but the core inflation itself, I think it's plausible that it would have been a little bit lower, but only a little bit in the European context February March of this year basically had two forces, so there is a confusing effect: one is absolutely war and war.

If you look at me, it's such a gigantic breaking point for consumer confidence, investor confidence, all of this, absolutely, there's a real discontinuity. Around that point, um and I also mean, I think it's pretty certain that the price of gas has held up, you know, and it's not just where it is now, but the expectation will be high next year, it connects to the war. but this is basically also when the European economy reopened when enough people had been vaccinated and the winter wave had calmed down, so it was around March, so within the same ballpark that we would have seen, we saw a very large increase in consumption, um and So what I would say to what Jason just said, which is conceptually correct, is that essentially, the impact of the short-term effect was that all of these sectors in the reopening also took into account that the increase in cost of Jeff's fuel affected other effects and The extent to which several countries initially protected people from retail prices is that the kind of real income effect of high entry prices is only happening now, so I would say that the channel of demand is one of the reasons why the Commission today has a recession in Europe now this quarter and going into the next quarter, so the exact moment at which, over the course of one or two years, which channel dominates , the disinflationary impact, you know, may not have fully developed, so we have a confounding effect here.

Now maybe fundamentally that's why I showed the price level, not just inflation at the beginning. One of the big problems for Europe is going to be a permanent loss of terms of trade and this is both for the current value of people's assets. income for companies' consumption decisions, companies could have said: "Okay, I will fight with high energy prices for a while, but at some point, if you are an energy-intensive company or sector and you have mainly High and energy The problem is not global because with the gas price differential between North America and the Gulf versus Europe, there is a kind of competitiveness problem here because there is always the option of importing or relocating to a place with this energy cheaper.

These are really important issues that have to do with the kind of medium-term exit that largely connects to the future of war and the future of geopolitics, so even if some of the big increases remain off the inflation rate because I know inflation is the exchange rate is not the level uh that doesn't mean that these problems don't go away I have a feeling that certainly if you listen to the media there's a lot of confusion between inflation , the inflation rate and the price level, you know, just like people can't see it well on TV, but uh, and you know, if you're wrong about one in five of my tweets, well, you're trying to squeeze the words out, I guess, but Well, you know, you think about food prices, for example, even before the Ukraine war, they were at a historically high level and then, you know, they went up even higher and I know that, and certainly, in the emerging world in the developing world, even with some relief, the effects have been devastating socially and, you know, fiscally and in many dimensions, okay with this.

I would like to leave some time for the audience if you have any questions, so please, there are two microphones, please line up behind each one. of the microphones and I will call him. We are being broadcast, so please identify yourself before asking your questions so online participants or the audience can know who you are. Why don't you start, sir? Well, I'm Charlie Kimball with the Korean Center for International Finance. I'd like Jason to explain his incomplete hard landing and tell us what he thinks it means not for next year but for the year after that in terms of how much GDP could fall in the two years combined and then I'd like Philip to argue for Europe, maybe that means instead of a downward slope between debt and GDP, maybe if Jason's fourth scenario, his most likely scenario comes true and plays out over a couple of years, what that could mean for a debt-to-GDP ratio in Europe. and then for Carmen, doesn't this threaten emerging middle income markets as well if we have a continued hard landing that lasts a couple of years?

Thanks oh yeah we're going to answer some questions and then add them so please. that Trump Ted Truman in the head of our Robani Center for business government authority Harvard Kennedy School a big mouthful by the way uh uh I would like this actually a question for Bill uh uh there are two sides to the argument that Maury has It was asked about the central banks, perhaps going too far at some point, one is that they, one is the question just posed that way, the other is that the central banks are not taking into account what is happening elsewhere , as someone who was in the business of taking into account what is happening elsewhere.

I'm wondering if you share that concern, um, or how are you on the panel because you're the only sitting central banker on the panel? important concern, or in terms of your thinking and that of other central banks that you speak to in the context of Basel, thank you, yes, this is Joe Gagnon, from the Peterson Institute for International Economics, my question is for Phil, although I think that anyone might want to comment on. I was struck by the graph that showed that it showed a fairly large demand component for inflation in Europe and I think that is the methodology of the San Francisco Fed that analyzes very micro data, but if you analyze more aggregate data, it is based on reasonable but debatable assumptions about aggregate demand and supply slopes.

One could argue that nominal GDP is exact demand and then the division between inflation and growth is aggregate supply. To that extent, the United States has a large increase in aggregate demand relative to the pre-pandemic trend, but wasn't Europe right in the second quarter about the nominal GDP trend? I mean, that would justify a very different monetary response, much less so in Europe compared to the U.S. Do you think that's a useful way to look at it? You know why? I don't know why this discrepancy was so large. I was surprised to see it, but you know some people think the Central Bank should stabilize nominal GDP or aggregate demand, which would be comforting for you to point out.

I would think that the New York Fed's Linda Goldberg window, in terms of looking back rather than forward to the beginning of thepandemic around the world, we had very aggressive fiscal monetary prudential responses now that historical time has passed since those responses um Is there any lesson that I can learn from what could be done differently in the future if some kind of shock like that does it happen again? So do you think there was any direction where there was too much aggressiveness or too little? What would be your point of view? Well, let's take the last question and then come back to you, thank you Peter Williams evercore isi.

I am more curious. I think a lot of the discussions about moves in the Stars focused on nairu or potential GDP, but I'm curious what it is. Everyone might think about the movement of the R star after the pandemic and then also the subsequent supply shocks, especially in the context of extreme amounts of fiscal policy in recent years, obviously the most curious thing is Phil's opinion, but They're probably less likely to thank Jason. Why don't we start with you and be sure? I'll take some of that income you know. I think the way people talk about the market is what seems most incorrect to me is that inflation is dichotomous, it's this disease that you have. and then the disease is cured while it's a Continuum and there's a lot of numbers between eight and two that I could assume and that, you know everything will proceed in a monotonous way, so you know maybe you'll have your recession and then inflation is rates go up. and then rates go down again.

Etc. Historically, these things have gone through various stages, so it could go through a recession, maybe it's a shallow recession, which I think is the most likely scenario we're sitting in now coming out of it. This leads to high risk inflation, so rates need to be raised again, maybe even higher than when they went into the recession, so some sort of non-monotonic multi-year process would be sort of a thing for me. of a modal. Casey or what it is exactly, I don't know, but I don't think it's, you know, the Fed cuts rates at the end of next year and keeps them low, forever, you know, Linda, your question, I think the answer of 2020. was superlative I think everything done by the New York Fed was superlative um, I think we learned that when people say things like um, you know it's better to do ER on the side of too much than too little, which in you can actually ER on the side On the side of too much, obviously we did that in the United States, in terms of fiscal policy, we gave people a sufficient amount of money so that they consumed approximately one hundred and twenty percent of what they consumed previously in an economy where initially, because of the pandemic and then because of supply chains, we were unable to produce, you know, more than 90 percent of what they consumed and that's in 2020, I had no idea how to size the tax relief.

I was sitting there in March working with policymakers and we just had no idea how to think about the appropriate side, by the summer of 2020 we knew much better what the output gap was, what the likely trajectory of the economy was, what was a multiplier, so I think there was basically no excuse for putting in an amount of fiscal stimulus that was several multiples of the output gap and I think the consequences of that are higher inflation, lower real wages and you sort of accelerated your profits to a certain point, but you know that the pain is distributed later and maybe increase the total amount of pain to the extent that you did something like increase expected inflation in the process, so, hopefully, next time, you know Frankly, I'm more worried that we're going to do too little, not too much, but hopefully, not only will we continue to make mistakes, but we'll get it right the third time, Philip, so, as for Ted's question, obviously we would have a large international group doing that as well, and honestly, it's the first part of the process to build our forecast is the assessment of what's happening in the rest of the world, so it's a starting point.

In the sense of everything that influences that, including the role of multipartyism. Elsewhere, it's absolutely there what I would say. It means that the usual partition of the spillover of US military policy is where you have the projected effect on global levels of activity, global prices of raw materials, prices of tradable goods, all the ways in which that the multiple policies of the US have a fairly significant imprint on the world. activity levels, so although trade between the United States and Europe is quite limited bilaterally, the global channel is very important, the second channel is through arbitrage in the financial system, so you absolutely know that when there is a higher risk-free dollar rate, rates will rise, you know, and previous audience you know someone, I think you could say that is or star a sufficient indicator for this state of the financial system.

I mean, there are no shortcuts, you have to look at all the different rates that are relevant to financial conditions and such. Two effects develop very significantly, especially in the medium term, and on top of that, there is the exchange rate effect. Now the extension effect probably operates more quickly and pushes in the other direction, so you know, you know, so I think, uh, we. I'm very aware of all of that, I mean, on the Earth star, I mean, this is where there's this kind of painful lack of coherence about what we're talking about when we talk about this topic, so you know, I generally try to refer to asymptotic or Star, basically, when all the sharks are gone, the inflations are two and there is no shock at all, what is the rate you need to sustain that in that kind of continuous stable state?

Gita to Jackson Hill had a good presentation on here is the plus and minus influences on that rate. I have an open mind about those long-term influences and I also don't think it's particularly relevant right now because the scale of the kind of non-asymptotic interest rates, uh appropriate, so this is why do we say we're going to raise rates at the level necessary for inflation to return to two percent in a timely manner? Above Target, people are more likely to upgrade and that level will be driven by cyclical considerations and you know the list of factors in In Europe, what you might think is obviously the interest rate that we started with was a rate super low, well below neutral, we have a labor market where, if you look at it as a whole, whether you look at unemployment or vacancies. at least there are questions about whether this cyclical tightness there are some problems that could be alleviated in terms of the return of international workers who came home basically during the fiscal pandemic are more supportive than normal, but there is definitely an element there that is cyclical , not long-term support.

So Peter, in terms of what it entails or, I would have thought it's kind of a steady state deficit, it's the o Star component, not temporary, and then of course inflation is well above targets. which creates cyclical issues in terms of relationship behavior, etc., that has to factor in for us in terms of where the interest rate needs to be to bring inflation back to two percent in a timely manner, those technical considerations in the reversal of loosening so that you know that at least stop having rates well below neutral and then also taking into account these other factors and the supply and the capacity to supply, there is a little bit of complication.

The factor here is that supply bottlenecks are easy, inflation is definitely being driven. by all kinds of supply constraints, but we think it's easy and therefore it will improve a type of supply factor that will be disinflationary. On the other hand, we have to make the assessment going back to what I said, that is, if energy prices are high indefinitely how much does that erode potential production, which is now I would say that this is not a new surprise for us throughout the year, screening after screening, there have been revisions in our opinions on potential production, um, but we have to continually evaluate that maybe I'll stop there now, you feel like Corman, so should we worry about middle-income countries, high income beyond the low income, we know, most of whom are in debt?

The answer is absolutely yes, let me break that down into two parts, the first part is the initial conditions in middle income countries, uh, they also deteriorated noticeably even before covid and by that I mean, if you look at whether it's external debt, public debt, government, private debt, various debt markers to varying degrees, but the trend was definitely significantly upward even before the code, really around 2015, you start to see the debt numbers, so there are definitely more vulnerabilities in that score , debt servicing costs despite being in a low interest rate environment for a long time, had been The rising costs of debt servicing had increased particularly for mid- and high-tier countries, even relative to low-income ones, because low-income ones were getting more favorable rates.

So those are areas of vulnerability, but I would like to highlight that I've been discussing here focusing on sovereign debt crises, but you know Maury in his Tipping Point slide also points in the direction of a variety of other vulnerabilities, you know, certainly, you know, when we think about Turkey right now, we're not thinking. necessarily imminent of a sovereign debt crisis, but inflation or, you know, more than 70 percent, you could call it inflation crisis, if you look at the world development report that we did, we were pointing out there also, importantly, part of the sector private, some of the uh issues that are to some extent hidden in the balance sheets of the private sector balance sheets in the financial sector because during covid, there was a lot of forbearance in many emerging markets, tolerance of middle income emerging markets in the that, non-performing loans are no longer classified as non-performing loans and these types of vulnerabilities can really, you know, present themselves acutely if there is a recession if a global recession is longer if the interest rate increase is higher or tougher more if there are local conditions That change, I mean, you know, Brazil has done brilliantly in dealing with the inflation spike, but now you know that with Lula's re-election there are all kinds of concerns, so I think I stand by my point that sovereign debt crises in the middle.

High incomes are not at the extremes, you know, we saw that at the beginning of a wave of defaults in the 1980s, but there are a lot of vulnerabilities that can change that pretty quickly and just a quick second to Linda's question. Linda, my sense it's too early to learn many lessons because you know, I mean, there's an old saying, you know the opera isn't over until the fat lady sings and this opera isn't over yet, um, but the most important thing is also when We try to draw. The lessons are going to be complicated by the fact that, for example, the fiscal stimulus, the monetary stimulus and this we also highlighted in the world development report was very, very different and has been documented in several of the IMF.

Very different posts for advanced economies than for middle income countries and for low income countries many would not know that they had a pandemic uh in terms of fiscal response because there was very little um no, it's true that advanced economies recovered better that middle-income and middle-income countries recovered better than low-income, but there were also a lot of limitations on low- and middle-income that advanced economies didn't have, so I wouldn't know directly. without a really careful study attributed to the pandemic response, thanks Carmen, we're already out of time, but I want to make sure we have a few minutes for Maury's last words of wisdom.

I'll try. Try to keep it brief, you know, a lot of what we've talked about and this was Ted's question about the international spillovers of policies and Carmen has certainly highlighted a lot of them in her presentation. I think international spillovers are normal and are normal circumstances. Central banks forecast that they can

offs

et external shocks to some extent and are not a big problem. However, I think history teaches us that in situations of exceptional stress with large common shocks there is the potential for beggar-thy-neighbor effects that can lead to much worse collective outcomes, so I think central bankers just They should keep in mind that it is important since their internal problems are... there are repercussions abroad that could ultimately affect the internal results and this does not mean that there would necessarily be large deviations in no, this is something that the background does all the time and it's important because I believe that a communitybroader policy, you know, lift your head and think about what's happening elsewhere.

Well, I really want to thank our four panelists. I mean, I think we can all give them a big round of applause. I mean, we are certainly very privileged to have all the experience and wisdom that you brought to this panel. It's much needed here in the background and I think this will clear out a lot of the messages and work on them in the coming weeks and months, so thanks again.