gabriel makhlouf : monetary and fiscal policy in times of inflation remarks by mr gabriel makhlouf, governor of the central bank of ireland, at the dubrovnik economic conference, dubrovnik, 27 may 2023. * * * the current macroeconomic environment is a complex one for policy makers. the outlook for inflation continues to be too high for too long : this means there is more ground to cover for central banks. monetary policy must be brought to levels sufficiently restrictive to bring inflation back to target in a timely manner. meanwhile fiscal policy must adjust its priorities to tackle the challenges of the major economic transitions involved in climate change, ageing populations and geo - economic fragmentation. but the increased cost of living generates political pressures that could slow this necessary adjustment. monetary policy fights inflation mostly through two channels : first, by reducing aggregate demand, and second, by anchoring the expectation of future inflation to its target. at times like this – when inflation is already far too high – expansive fiscal policy risks undermining both of these mechanisms. primarily by increasing aggregate demand, but also by signalling that the government is counteracting the effects of policies aimed at reducing inflation, potentially increasing inflation expectations. this is why i and others have previously called for cost of living supports to be targeted – i. e. at those most vulnerable to energy price shocks, temporary – so as not to add to persistent price pressures, and tailored - thus enabling further resilience to maintain sustainable growth in living standards. fiscal policy can be a major force for good, when it provides the stable foundation for a thriving economy, but it can also cause great harm by adding to inflationary pressures, which would inevitably call for an even stronger monetary policy response. monetary and fiscal policies need to work together to shore up macroeconomic stability. the coherence of monetary and fiscal policy is essential for macroeconomic stability. during the pandemic, we have seen how powerfully combined monetary and fiscal efforts helped our economies quickly get out of recession. but it is not only during downturns that monetary and fiscal policy need to coordinate their actions to effectively complement each other. an adequate policy mix is just as essential at times like this, when we must fight inflation. at a minimum, fiscal policy should avoid directly contributing to the building up of inflationary pressures. but preferably, fiscal authorities should support the disinflation effort by gradually bringing down high public debt, while also calibrating their policies to make

to the services sector is the ever rising globalization of services. in the past, services which, by nature, cannot be stored, were non - tradable. hence, there was no any prospect of selling, services beyond the borders of a country limiting its clientele to its own citizens. if any foreigner desired to avail himself of any services, he should necessarily have traveled to the country of services at great costs in terms of both time and money. this is why cross - border services were limited only to areas where foreigners could have them relatively at a low transaction cost. in this context, the services which played a prominent role in the global arena were shipping and insurance services where the service provider visited the buyer and travel, education and health services where the buyer visited the service provider. in all these areas, sri lanka had an upstart over other competitive countries. sri lanka ’ s university system at the time of gaining independence was one of the best in the world. it also had a very reliable and high quality curative health system. for shipping services, it had the best comparative advantage by being located on a very important naval route. its ports in colombo and trincomalee had the best cost - advantage. its highly literate work - force with professional qualifications from the uk and other advanced countries could have provided the best insurance and banking services to the rest of the world. but, due to the inward orientation of the policies adopted since independence, these comparative advantages got shifted to other countries such as singapore, hong kong and australia. for sri lanka, it is, therefore, a story of missed opportunities. it is too late now to lament over the failed past. what the country should do is to plan for the future, so that sri lanka could conveniently get itself integrated to the globalised services industry. as argued by thomas l friedman 9, the world has become flat and the world nations, including usa, should recognize the flattening process of the world. if a country stubbornly and arrogantly refuses to accept this fact, it stands to lose, while others continue to move forward on an accelerated high gear. india, being one such country, has identified many areas which were previously non - tradable and took action to promote them actively. the advancements in ict through a wired globe have enabled india to do so at a rapid pace. as indicated by friedman, business process outsourcing ( bpo ) coupled with such personal services as secretarial services