DSK: “Monetary policy alone cannot solve the inflation problem”

Economist and former head of the International Monetary Fund Dominique Strauss-Hahn called for a move away from monetary policy in response to the global inflation problem during the 11th edition of the Atlantic Dialogues organized by the Policy Center. for southern news (PCNS) from 14-16 December 2022 in Marrakech.

He emphasized the need to reactivate fiscal policy and multilateralism to ensure a collective response not only by central banks but also by governments to stop the spiral of inflation.

Unoptimistic about multilateralism, mainly because of the fragmentation that characterizes globalization today, he sought to answer three main questions:

• How long will inflation last?
• Will we witness a spiral of wage-price inflation?
• Should we let monetary policy solve the problem on its own?

Inflation can last quite a long time

Rather pessimistic, he thinks that inflation at the global level will continue for quite a long time. More specifically, he predicts that it will depend on two phenomena: the bullwhip effect and price rigidity.

The bullwhip effect, or the whip effect in logistics, is that during such a period, an increase in customer orders can lead to overproduction upstream of the chain, which can drive prices up and down.

Sticky prices correspond to the slowness of price adjustments to changes in supply and demand. It appears that prices are currently tight and not yet responsive to monetary policy, especially anti-inflation.

The possibility of an inflationary wage-price spiral

Dominique Strauss-Kahn believes that it will be difficult to avoid wage increases given that the labor market is quite tight. As the link between wage increases and prices no longer needs to be demonstrated, this risks fueling the inflationary spiral.

Although he thinks the bargaining power of the labor factor has eroded over the past decade, he believes this inflationary spiral will continue.

It is interesting that even the European Central Bank, an institution whose main task is to fight inflation, is experimenting with strikes demanding an increase in workers’ salaries.

In Europe, governments are implementing policies to counter inflation that may seem contradictory to what the economics textbooks say. Aid packages have been given to the population so that they do not suffer too much, for example by reducing the real price of energy for individuals.

This may seem like an expansionary policy, but in reality it is more about fighting inflation than monetary policy. According to the DSK, what is said in the instructions, so fiscal expansion can avoid a second wave of inflation.

The generalization of restrictive monetary policy is without merit

On the other hand, if he thinks that FES’s restrictive monetary policy in the US is a rational decision due to the importance of demand, he considers its generalization in Europe to be a “pretty ridiculous” decision, because it is located there with excess demand.

“It’s as if you see nails everywhere, you only have a big hammer,” says the SSC ironically, criticizing central banks that persist in applying traditional policies. According to him, the models adopted in the last ten years were useless because they were based on all the data, while failing to take several parameters into account.

He adds that monetary policymakers don’t know what to do. For Strauss-Kahn, the ECB is a blind sail that contrasts with the era under Mario Draghi and, in his opinion, poses the biggest threat of the next few years.

The weakening of multilateralism complicates matters

If interest rates were to be increased for SSC, it cannot solve the problem by itself. He believes that one of the main issues is not economic, but political, and this is related to the weakening of multilateralism in the world today.

“If we were able to overcome the crisis of 2008 and the recession that followed, then various countries and the G20 realized that multilateralism and economic coordination is the right thing to do. “Now we’re in a fragmented world where we think such actions are almost impossible,” he explains.

“In a globalized world where inflation is widespread, we need a collective response. The collective response is not only the response of central banks, it should go beyond that and include the actions of governments.”

It is possible to create coordination especially in exchange rate policy. “The problem is that there is a Chinese elephant in the room. Cooperation without China no longer makes sense. Maybe it wasn’t like that 14 years ago. But now it doesn’t make sense,” he adds.

But given that it is difficult to imagine cooperation between the US and China as things stand now, the problem is political.

Preference is given to developing and emerging countries

Dominik Strauss-Hahn also wants to warn against the “rebellion of the poorest” in developing and developing countries, which are currently living in a difficult situation, paying the costs of wars and decisions made at their expense.

“I think the IMF should go back to its core business and renew the lending process. You will recall that two years ago it started with many promises that special drawing rights would already be given to developing and developing countries. But very little has been done. We need to ensure the security of these countries, and this is part of the global solution,” he concludes.