SpecialArticle 1Interview with John Bluedorn, Deputy Division Chief in the Research Department, International
Monetary Fund

The Outlook for Global
Inflation & Monetary Policy

By Japan SPOTLIGHT
As the Ukraine War continues, fuel and food costs are pushing inflation higher. Inflation will accelerate
wage increases and monetary policy authorities around the world are concerned about a wage-pricespiral. According to economic theory, robust demand could further accelerate inflation, and in responding
to it monetary policy may as well maintain high interest rates, whereas otherwise it could be loosened.
Where are we now?
This is the key question in predicting the future of the global economy. We held a Q&A session by e-mailwith the International Monetary Fund’s (IMF) deputy division chief in the Research Department, JohnBluedorn.
(Interviewed on May 29, 2023)

Assessment of the Current
Global Economy
JS: How do you assess the latest

situation of the global economy?
Would it be right to say that a stronger
overall economy than we had expected
retarded the timing of loosening tightmonetary policies due to continued
concerns about inflation?

picking up, with year-end-to-year-end growth
accelerating to 4.5% in 2023 from 2.8% in 2022.
Additionally, supply chain disruptions caused by
the pandemic are unwinding, and dislocations toenergy and food markets caused by the war arereceding. These factors have contributed to thegradual recovery of the global economy.
JS: In particular, we see robust growthin employment and the unemployment
rate is being kept low in spite of low
economic growth. Why do you think
this has happened?

Bluedorn: The global economy is experiencing a
gradual recovery from both the pandemic andRussia’s invasion of Ukraine. China’s economy isBluedorn: Most advanced economies have robust
rebounding and supply chain disruptions areemployment growth, and the unemployment rate
unwinding, while energy and food markets’remains low despite low economic growth. Thisdislocations caused by the war are receding. Most
John Bluedorn
phenomenon is likely due to several factors.
central banks have tightened their monetaryFirstly, the gradual recovery of the global economy has led topolicies, and inflation is expected to return toward targets. Global
increased demand for goods and services, which has positively
growth is expected to bottom out at 2.8% this year and rise modestly
impacted employment growth. The strong labor markets in most
to 3% next year. Though more slowly than initially anticipated, global
advanced economies have also contributed to stronger-thaninflation will fall from 8.7% last year to 7% this year and 4.9% in
expected aggregate demand, further supporting economic growth.
2024.
Secondly, the pandemic has caused a significant disruption tolabor markets, with many workers losing their jobs. As a result, there
JS: Why do you think global economic growth wasmore robust than expected?
is still significant slack in labor markets, which has allowed
employers to increase employment without significant increases inBluedorn: Global economic growth is experiencing a gradualwages. This has contributed to keeping the unemployment rate low,
recovery due to several factors. Firstly, China’s reopened economy iseven in the face of low economic growth.
rebounding strongly, positively impacting the global economy.
Finally, some factors could explain why employers are willing toSecondly, many emerging markets and developing economies arehire more workers despite low economic growth, such as increased
28 Japan SPOTLIGHT • July / August 2023

https://www.jef.or.jp/journal/

productivity, automation, and lower labor costs.

Role of Monetary Policy
JS: This labor market situation could trigger wage

rises and revive concerns about a wage-price spiraland inflation. Would monetary policy be the only way
to modify these concerns?

Bluedorn: The labor market situation could trigger wage rises andconcerns about a wage-price spiral and inflation, but the risk of an
uncontrolled wage-price spiral is not a major concern at this point.
Corporate margins have surged in recent years, and they should be
able to absorb much of the rising labor costs on average, provided
that inflation expectations remain well-anchored. Monetary policy
may play a role in modifying concerns about a wage-price spiral andinflation, but other factors, such as corporate margins and inflation
expectations, are also important. Policymakers need a steady handand clear communication, and fiscal policy can also play an activerole in supporting monetary policy.
JS: Could continuing tight monetary policies to copewith such a wage-price spiral result in a hard landing
for the global economy?

Bluedorn: As previously mentioned, the risk of an uncontrolled
wage-price spiral is not a major concern. Policymakers need a steadyhand and clear communication. A coordinated and measured
approach is necessary to address concerns about a wage-price spiraland inflation without risking a hard landing for the global economy.
Fiscal policy can also play an active role in supporting monetary
policy, and regulators and supervisors should act to ensure thatremaining financial fragilities do not turn into a full-blown crisis.
JS: How could we avoid such a hard landing?
Bluedorn: To avoid a hard landing for the global economy, wesuggest a coordinated approach by policymakers, which includes
focusing on financial stability, bringing inflation down, supporting
monetary policy with fiscal policy, strengthening financial oversight,
allowing exchange rates to adjust as much as possible, ensuring

proper access to the Global Financial Safety Net, and avoiding
geopolitical tensions.

Role of BOJ under New Chairman’sLeadership
JS: What role do you think the Bank of Japan (BOJ)should play in stabilizing the global economy with its
new chairman?

Bluedorn: Growth in Japan is expected to remain relatively modest in
2023 and 2024 at around 1.3% and 1%, respectively. However, theunderlying inflation momentum has picked up, with core inflation
reaching a four-decade high in April. In our latest projection, inflation
is expected to gradually come down and fall below the 2% target bythe end of 2024. But there are significant risks to our inflation
forecast. On the upside, wage growth may accelerate faster than
expected given the strong results from the spring wage negotiation.
On the downside, the risk of a slowdown in the global economy
remains. In this context, monetary policy should remain
accommodative, but the central bank should allow greater flexibility
in longer-term yields and allow market forces to play out.

Adverse Effects of Tight Monetary Policy
JS: High interest rates could increase government

debt and cause fiscal instability. Would this lead to a
weaker currency and raise inflation further?

Bluedorn: IMF staff calculations suggest that the effects of recent
increases in inflation and nominal interest rates on debt service
burdens may be rather limited for most advanced economies andemerging market and developing economies with strong institutions.
In particular, an increase in the real spot market rate of a 10-year
government bond feeds into effective rates (the rate that is relevant
for servicing debt burdens) far less than one-for-one. In addition,
central bank credibility may help to keep inflation expectations
anchored. Hence, higher interest rates only permeate slowly into
debt service costs and would not lead to raising inflation further.
Over a longer timeframe, and once inflation pressures havesubsided, equilibrium real interest rates are expected to remain at
Japan SPOTLIGHT • July / August 202329

low levels due to structural forces, which should also help to keep incheck real debt servicing costs.

External Balances & Monetary Policy
JS: Should countries with current surpluses andstronger currencies continue to stimulate theeconomy with loose monetary policies and active
fiscal policies to achieve balanced global growth?

Bluedorn: Macroeconomic policies should be used to achieve
domestic objectives, primarily stimulating growth and keeping
inflation in check. From this perspective, countries in which growth
remains below potential should continue supporting the economy
through fiscal policy, especially if there is available fiscal space,
while at the same time putting in place credible plans for mediumterm reduction of public debt. With inflation still high all over theworld, there is a case for exiting from loose monetary policy.
However, the pace of monetary tightening will depend on countryspecific circumstances and can be more gradual in cases in which
economic activity needs to be supported and inflation expectations
are well anchored. Even though supportive fiscal and monetary
policies are aimed at domestic objectives, they would most likely
contribute to reducing current account surpluses – by increasing
domestic consumption and investment, and therefore imports – andthereby contribute to achieving a more balanced global growth andreducing global current account imbalances. Those policies also
contribute to depreciating the currency. It is important to keep inmind, however, that for important reserve currencies which play amajor role in international trade and finance, the value of thecurrency is determined not only by domestic policies but also by
global market sentiment, including through so-called safe haveneffects.

Bluedorn: Global economic stability under inflation requires acoordinated and measured approach by policymakers acrossnations. Possible macroeconomic policy cooperation among thenations that can contribute to global economic stability underinflation include:
Coordinated monetary policy: Central banks across nations should
coordinate their monetary policies to ensure that inflation is kept
under control, while avoiding any sudden shocks to the global
financial system.
Fiscal stimulus: Governments can implement fiscal stimulus
policies to support demand in their economies and promote growth,
while avoiding excessive debt buildup.
Financial regulation: Policymakers should ensure that the global
financial system is well-regulated and monitored to prevent thebuildup of systemic risks and the emergence of financial crises.
Exchange rate management: Countries should avoid competitive
devaluations and ensure that exchange rates are allowed to adjust
based on market conditions, while preventing exchange rate volatility
that can contribute to global economic instability.
International cooperation: Policymakers should work together topromote global cooperation and collaboration across countries andregions, as well as a focus on addressing the root causes ofgeopolitical tensions and instability.
Overall, a coordinated approach that balances monetary and fiscal
policy, strengthens financial oversight, and promotes international
cooperation can help achieve global economic stability underinflation.

Macropolicy Cooperation to Restore
Economic Stability
JS: What do you think would be the best means ofmacropolicy cooperation among nations to achieve
global economic stability under inflation?

30 Japan SPOTLIGHT • July / August 2023

Questions by Naoyuki Haraoka, editor-in-chief of Japan SPOTLIGHT.