Global Inflation – A Complement
In our last weekly report, “Global Inflation and Slower Growth: Consequences for Brazil”, we analyzed the reasons (fiscal and monetary) for the resilience of worldwide inflation. The objective of this report is to provide further information regarding the reactions in the monetary and fiscal fields in the United States and European countries.
We start by discussing the estimate of the neutral real interest rate for a set of developed countries presented by Lukasz Rachel and Larry Summers (“On secular stagnation in the industrialized world”, NBER WP), showing that before the fiscal expansions in reaction to the pandemic, it was near zero. This result led to two consequences. In the field of monetary policy, the central banks were obliged to apply unconventional monetary measures, especially the purchase of financial assets (predominantly treasury bonds of the respective countries), financed with interest-bearing bank reserves.
The effect was to lower the interest rates at the long end of the yield curve, culminating in economic expansion. In the fiscal policy field, the countries generated large primary deficits, and given that r < g (the real interest rate is lower than the economic growth rate), this did not cause any solvency problem of the governments. Expansionary fiscal policy not only increases aggregate demand, it also raises the neutral interest rate. With this backdrop, we described: a) how the expansion of the assets of the Fed and ECB occurred; and b) what instruments were used to expand the primary deficits. We call attention to all these points because the current episode differs from what has historically happened. At present, the Fed and ECB are acting in the opposite direction, necessary due to the strong and resilient growth of inflation.
Now read on...
Register to sample a report