Ive here. As we’ve mentioned, even some orthodox economists are questioning whether raising interest rates is a good tool to combat inflation caused by commodity scarcity/disrupted supply chains. The idea looks worse in the global south, where small/emerging economies are hit by changes in U.S. interest rates. Given the potential seriousness of the dislocation, we would be lucky if the worst-case scenario we had was stagflation, even before central banks were allowed to administer the wrong drugs.

By Anis Chowdhury, Adjunct Professor at Western Sydney University and UNSW (Australia), has held senior UN positions in New York and Bangkok, and former Economics Professor and UN Assistant Secretary-General Jomo Kwame Sundaram (Jomo Kwame Sundaram) economic development and was awarded the Vasily Leontieff Prize for advancing the frontiers of economic thought.Originally Posted in Jomo Kwame Sundaram’s website

“If your only tool is a hammer, every problem looks like a nail”. Still haunted by the deft sermons of monetarism guru Milton Friedman, too many monetary authorities address every threat or sign of inflation they see by raising interest rates.

Friedman’s quote”Inflation is always a ubiquitous monetary phenomenon“Still defining orthodoxy. Despite the changes in the world today, for the Friedmanians, inflation must be contained by monetary tightening, especially interest rate hikes.

No Central Bank Governors Consensus

The threat of rising inflation has risen as Russia invades Ukraine and the West responds with punitive “hell sanctions”.International Monetary Fund (IMF) Managing Director Kristalina Georgieva warn Broad sanctions on Russia will increase inflation.

European Central Bank (ECB) President Christine Lagarde fear, “The Russian-Ukrainian War Will Have Significant Impact on Economic Activity and Inflation”.US Treasury Secretary Janet Yellen admit new threats.

she admit Tightening monetary policy could be tightening, but expressed confidence in the Fed’s ability to balance this. Meanwhile, Federal Reserve Chairman Jerome Powell promised “careful“.

called the Russian invasion”game changer”, the outcome is unpredictable, and he stressed his readiness to take more aggressive action if necessary. On March 16, the Fed Raise short-term benchmark interest rates It also hinted at six more rate hikes this year.

But other central bankers disagree on how best to respond.Bank of Japan Governor Haruhiko Kuroda exclude Tighten monetary policy.He recently pointed out that “dealing with [cost-push inflation] By scaling back stimulus or tightening monetary policy”. For Kuroda, rate hikes are not suitable for tackling inflation due to soaring fuel and food prices.

Some of Friedman’s protégés at central banks are tightening monetary policy from mid-2021. The Reserve Bank of New Zealand pioneered strict inflation targeting in 1989. Rate hike in August Second time in two months.

Bank of England (BOE) rate hike In December, for the first time in more than three years. Going further, Norges Bank doubled its policy rate on the same day.

Expected U.S. rate hikes and pressure from financial markets, some emerging market and developing economy (EMDE) central banks, such as Brazil, Russia and Mexico – start raising policy rate After the inflation alarm sounded in mid-2021. Indonesia and South Africa Join the ranks in January 2022.

Ukraine effect

Bank of Canada as inflation soars after Ukraine invasion double Key rate on March 2 – the first increase since October 2018.

The ECB takes a more hawkish stance, giving up more cautious early language. Its Council reaffirmed an age-old commitment that “take any necessary action“Pursue price stability and maintain financial stability.

Following the Fed’s move, the Bank of England raised interest rates the next day. A month ago in February, the chief economist of the Bank of England opposed raising interest rates and supported them. nuanced approach.

However, instead of a knee-jerk rate response, Reserve Bank of Australia Governor Philip LoweBe prepared to be patient“While monitoring developments.

EMDE central bank governors also reacted differently. Brazil raises benchmark interest rate rate after the Fed and hinted that further rate hikes are likely this year.but Indonesia is more cautious.

Interest rates are not a panacea for inflation

Interest rates are a blunt policy tool. It did not differentiate between activities facing rising demand and supply disruptions. Therefore, higher interest rates will adversely affect investment in sectors that face supply bottlenecks and need more investment.

In short, interest rates are indiscriminate. But the policy orthodoxy that has prevailed over the past 40 years does not distinguish the causes of inflation, viewing higher interest rates as a miracle of a “panacea”.

This monetaristic policy orthodoxy does not even acknowledge the multiple causes or sources of inflation. Most observers believe that current inflationary pressures are caused by demand and supply factors.

Demand may surge in some industries, while others face supply disruptions and rising production costs. Now, the crisis in Ukraine and the ensuing sanctions have disrupted supplies, exacerbating all of this.

forgotten old lesson

More than half a century ago, the United Nations 1956 World Economic Survey “It seems unlikely that a single economic policy will overcome all the sources of imbalances leading to rising prices and wages, just as a single drug cannot cure all fever-causing diseases,” the warning said.

Using measures designed for “demand-pull” phenomena to address “cost-push” inflation is not only inappropriate, it is also disruptive.UN warns it could significantly increase unemployment without curbing inflation 1955 World Economic Survey As Friedman’s anti-Keynesian arguments emerged.

Interest rates do not differentiate between consumer credit and investment spending. In order to adequately curb demand, interest rates were raised sharply. This monetary tightening can cause many lasting economic losses.

Reducing or reducing investment is not conducive to the progress needed for sustainable development, which requires innovation and productivity growth. After all, improved technology often requires new machines and tools.

No one is “one size fits all”

Tackling “stagflation” caused by a combination of factors—economic stagnation and inflation—requires fiscal and monetary policies that go hand in hand. They also require specific tools and regulatory measures for specific purposes.

Monetary authorities should also create government fiscal space by funding unanticipated urgent needs and long-term sustainable development projects, such as renewable energy.

With food and fuel prices soaring, governments need to first provide some immediate cost-of-living relief to quell the unrest. This could be achieved through measures that could include food stamps, a moratorium on taxes on key consumer goods, and more.

In the medium to long term, governments can expand public subsidies for health care, transportation, housing, education and childcare to offset rising living costs. This public supply—increasing the “social wage”—scatters wage demand and prevents wage price spirals.

Such policy moves lowered Australia’s inflation rate in the 1980s, but did not result in mass unemployment.This is in stark contrast to the deep recession in the U.S. economy U.K and America And then due to high interest rates.

get the right medicine

But to do this, the government needs more fiscal space. Therefore, tax reform is crucial. Incremental tax reforms—such as the introduction of a wealth tax and higher marginal tax rates for high-income earners—have also reduced inequality. The government also needs to adjust its short- and long-term fiscal policy framework.

Monetary authorities need to use a combination of tools, such as commercial bank reserve requirements, more credit (including differential interest rate facilities), and more inclusive financing.

For example, central banks should limit credit growth in “overheated” sectors while expanding affordable credit for sectors facing supply bottlenecks. Central banks also need to curb credit growth that could be used for speculation.

Governments also need to put in place regulation to prevent unscrupulous monopolies or cartels from trying to manipulate the market and create artificial shortages. Regulatory measures are also needed to check commodity futures and other speculation.These Increase Issues such as rising food and fuel prices.

Relying solely on the rate hammer is a monetaristic belief, not macroeconomic wisdom. Pragmatic policymakers have shown great creativity in designing more appropriate macroeconomic policy responses—not just against inflation, but worse, the stagflation that is currently threatening the world.