Four Questions to Consider in Dealing with Stagflation

 　　The global stagflation risk is heterogeneous, which is mainly manifested in: European countries have a higher possibility of economic recession; some emerging market countries have also experienced slowing growth and high inflation; Asian countries have more prominent economic performance, and the risk of stagflation is relatively high. lower.

　　The current inflation phenomenon is the result of a combination of supply and demand factors. Among them, the demand-side effect may be more significant in the United States, because the United States has implemented loose monetary policy and large-scale fiscal stimulus measures. On the other hand, we are facing a series of severe supply shocks, and the impact of certain contextual factors, such as carbon reduction efforts and deglobalization forces, have both pushed up commodity prices, and these factors will also continued for a period of time.

　　In the face of the double shocks of supply and demand, especially the multiple supply shocks that will continue, what is the current reasonable response policy?

　　So far, everyone seems to be focusing on monetary policy, especially the pace and magnitude of Fed tightening. Many believed the Fed was too optimistic at the time and should have tightened monetary policy sooner. But I don’t think anyone could have predicted the Russian-Ukrainian conflict last year, and no one could have predicted the power of the Omicron mutated virus last year. What's more, by looking at the US 10-year Treasury yield, we can find that the market has very low long-term inflation expectations for a long time, which means that the Fed does not need to act prematurely. Of course, this has already happened.

　　Based on this, I would like to ask the following four questions:

　　First, should the Federal Reserve and other central banks adopt extra aggressive monetary tightening policies to reduce inflation and compensate for their lack of foresight and failure to act earlier?

　　Second, the current US and world economic growth has slowed, in part because financial conditions have tightened considerably. Implementing more aggressive austerity policies will further hamper growth and increase the risk of recession. If the price of lower inflation is a recession, is it worth it? If you have a choice, which is more to avoid, inflation or stagnant growth?

　　Third, since a significant portion of current inflation is driven by structural factors and relative price changes, the price of some commodities must fall in order to bring headline inflation to pre-pandemic levels, a process that can be difficult and painful. So, in order to allow room for relative price adjustments, would it be more beneficial for the economy to tolerate higher inflation for a period of time and to set an inflation target that is slightly higher than the previous "equilibrium" or ideal inflation rate? For example, the decarbonization movement will inevitably push up the prices of some commodities, and if the inflation rate requirements can be relaxed appropriately, it may be more conducive to the adjustment of related industries.

　　Fourth, given the complexity of the current causes of inflation, is it reasonable to rely solely on monetary policy to fight inflation? In fact, globalization has had the effect of reducing inflation for the past 20 years. But some politicians are forcing companies to “de-globalize,” a practice that could fuel inflation and put downward pressure on economic growth. If coupled with monetary tightening, will it make the economic situation worse? In this context, how should the costs and benefits of implementing monetary tightening be measured? The U.S. government attaches great importance to the impact of inflation on voters. Can the U.S. government consider other policy measures such as lowering tariffs, lowering trade barriers, and repairing supply chains to fight inflation?

Academic point of view

The impact of entering into regional trade agreements

　　Yang Xi, Xiamen University, Yang Yuzhou

　　, "Regional Trade Agreements under Global Value Chains: Effect Simulation and Mechanism Analysis"

　　World Economy, 2022 Issue 5

　　This paper evaluates the trade and welfare effects of regional trade agreements under the framework of global value chains. The regression results show that the effects of signing regional trade agreements on intermediate production trade and final consumption trade, gross trade and value-added trade are significantly different. Based on this result, this paper analyzes the regional comprehensive economic partnership agreement as an example, and shows that: the global value chain mainly affects the economic effect of the regional trade agreement through the intermediate production trade, and the contribution of the liberalization of the intermediate production trade to the increase of real wages in China is about 75%; GVCs help to weaken the trade creation and transfer effects of regional trade agreements, manifested in significant differences in changes in gross and value-added trade between economies within and outside the agreement; with the degree of participation in GVCs Rising, the impact of regional trade agreements on changes in a country's welfare becomes greater, and the adjustment of the proportion of value-added exports will also significantly change the welfare effects of regional trade agreements.