GLOBAL INFLATION AND CENTRAL BANK POLICIES: IMPLICATIONS FOR THE FUTURE OF THE WORLD ECONOMY

Abstract

Global inflation presents a serious challenge to the world economy, closely affecting monetary policies of developed and developing economies alike. Inflation pressures have recently increased due to supply line chaos and an expansionary fiscal environment amidst increasing global tensions together with a robust recovery in demand from the pandemic. In reaction, central banks have turned increasingly to interest rate policy as the primary means to achieve price stability and to anchor inflation expectations. This paper examines the monetary policy reactions of major central banks (including the US Federal Reserve System and the European Central Bank) and assesses their implications for the world economy more generally. It assesses the spillovers of stringent monetary policies on developing and emerging economies, such as capital outflow, currency depreciation and higher external debt. In the end, although tight monetary management is required to curb inflation, excessive tightening could have implications for growth as well as financial stability and more balanced policies at a global level are called for.