Advanced economies are grappling with a pernicious mix of high and rising public debt and persistent inflation. The textbook remedy for this twin challenge, Giancarlo Corsetti and Leonardo Melosi write in F&D, is a mix of monetary and fiscal policies: central bank commitment to lower inflation backed by credible fiscal adjustment to stabilize debt.
But, the authors write, geopolitical fragmentation augurs a world where rising risks of supply disturbances threaten stagflation pressures and demands on fiscal policy exacerbate outstanding imbalances.
"The new global equilibrium is not yet defined, but fiscal sustainability and macroeconomic stability during a rocky transition will likely require policymakers across advanced and emerging market economies to accept moderate—if temporary—higher-than-desired inflation."
