Monetary Policy Responses to the Post-Pandemic Inflation

Bill English; Kristin Forbes; Ángel Ubide

Demand rebounded more rapidly than expected after the COVID pandemic. This interacted with a series of unprecedented supply-side shocks around the shutdown and reopening of economies, along with broad-based increases in commodity prices following the invasion of Ukraine. Inflation spiked to the highest level in decades. In response, central banks tightened monetary policy sharply. This book explores the commonalities and differences in countries’ strategies, as well as lessons for the next inflationary episode. The first two sections of the book summarise the responses by fifteen central banks from advanced and emerging economies, with chapters written by senior central bank officials and economists. Emerging market central banks were the first to raise rates in response to high inflation; they were more concerned about maintaining credibility and less constrained by asset purchase programmes and forward guidance. By contrast, advanced economy central banks were slower to adjust policy; they were more confident in the anchoring of inflation expectations and initially more constrained by earlier policy communication. As it became clear inflation would be much higher and for much longer than forecast, with risks of becoming embedded in wage and price setting, central banks responded more aggressively. They raised rates quickly, in large increments, and to the highest levels in many years, often combined with steps to shrink their balance sheets. The final section of the book includes cross-country thematic chapters addressing broader issues around this high-inflation episode: the causes of the inflation spike, the interactions with labour markets, the role of energy shocks and energy policy, and the financial market responses. The final chapters discuss the implications for financial stability, international financial regulation, and monetary policy frameworks. This comprehensive overview of the monetary policy responses to the post-pandemic inflation provides a unique reference for scholars, teachers, policymakers, and investors seeking to understand and draw lessons from this tumultuous period.