Project Syndicate: Rather than rely on the “blunt tool of interest-rate hikes,” you argued last November, policymakers should have responded to the latest bout of inflation with “sensible policies such as mending broken supply chains, capping prices and profits in important sectors like food and fuel, and reining in commodity-market speculation.” Nearly a year later, rate hikes seem to have reined in inflation at relatively low cost to advanced economies. Is the bill for these countries yet to come due? What steps can developing economies – which have paid the price – take now to achieve “greater fiscal autonomy and monetary-policy freedom”?

Jayati Ghosh: It is misleading to say that rate hikes have reined in inflation. Correlation does not imply causation. And, in fact, while inflation in the advanced economies has subsided, this is largely because the forces that fueled the latest bout of inflation – spikes in global food and fuel prices, as well as supply-chain disruptions – have subsided. In global commodity markets, prices peaked in mid-2022, but have since fallen, as speculative futures trading waned.

Interest-rate hikes are designed to deal not with cost pressures, like those that fueled the recent bout of inflation, but with “excess demand,” by making both consumption and investment more expensive. As a result, such hikes ultimately dampen economic activity and employment. These effects were less pronounced in the advanced economies this time around, owing to the legacy and persistence of powerful fiscal stimulus.

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QOSHE - Jayati Ghosh on greedflation, debt, corporate taxation, and more - Jayati Ghosh
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Jayati Ghosh on greedflation, debt, corporate taxation, and more

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07.11.2023

Project Syndicate: Rather than rely on the “blunt tool of interest-rate hikes,” you argued last November, policymakers should have responded to the latest bout of inflation with “sensible policies such as mending broken supply chains, capping prices and profits in important sectors like food and fuel, and reining in commodity-market speculation.” Nearly a year later, rate hikes seem to have reined in inflation at relatively low cost to........

© Project Syndicate


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