appropriate inflation measure of the rule should (i) shield the economy against fluctuations driven by self-fulfilling expectations 3 —Keynes’ animal spirits—and (ii) ensure that even if agents are boundedly rational—in the sense of adaptive learning as proposed by Evans and Honkapohja (2001) —they can still learn the monetary policy targeted equilibrium so the economy will converge to it. 4 Specifically, we develop a two-sector New-Keynesian DSGE model to study the determinacy and learning stability (E-stability) properties of Rational Expectations Equilibria (REE) for
Abstract
Global economic activity is experiencing a broad-based and sharper-than-expected slowdown, with inflation higher than seen in several decades. The cost-of-living crisis, tightening financial conditions in most regions, Russia’s invasion of Ukraine, and the lingering COVID-19 pandemic all weigh heavily on the outlook. Global growth is forecast to slow from 6.0 percent in 2021 to 3.2 percent in 2022 and 2.7 percent in 2023. This is the weakest growth profile since 2001 except for the global financial crisis and the acute phase of the COVID-19 pandemic. Global inflation is forecast to rise from 4.7 percent in 2021 to 8.8 percent in 2022 but to decline to 6.5 percent in 2023 and to 4.1 percent by 2024. Monetary policy should stay the course to restore price stability, and fiscal policy should aim to alleviate the cost-of-living pressures while maintaining a sufficiently tight stance aligned with monetary policy. Structural reforms can further support the fight against inflation by improving productivity and easing supply constraints, while multilateral cooperation is necessary for fast-tracking the green energy transition and preventing fragmentation.
Abstract
The authors of this chapter are Mehdi Benatiya Andaloussi, Benjamin Carton (co-lead), Christopher Evans, Florence Jaumotte, Dirk Muir, Jean-Marc Natal (co-lead), Augustus J. Panton, and Simon Voigts, with support from Carlos Morales, Cynthia Nyakeri, and Yiyuan Qi. They thank Jean Pisani-Ferry for helpful comments on an earlier draft.
Abstract
The authors of this chapter are Mehdi Benatiya Andaloussi, Benjamin Carton (co-lead), Christopher Evans, Florence Jaumotte, Dirk Muir, Jean-Marc Natal (co-lead), Augustus J. Panton, and Simon Voigts, with support from Carlos Morales, Cynthia Nyakeri, and Yiyuan Qi. They thank Jean Pisani-Ferry for helpful comments on an earlier draft.