Fragmentation of the Global Economy: How Central Banks can Tackle Increased Inflation Shocks

Catherine Mann, a policymaker at the Bank of England, emphasized the potential impact of a fragmenting global economy on countries’ exposure to inflation shocks during a panel discussion at the International Monetary Fund. She pointed out that the era of stable inflation and low volatility, known as the “great moderation,” is over, and central banks need to be more vigilant as a result.

Mann stressed the importance of central bank independence and inflation targeting but also noted that global integration played a significant role in maintaining stability in the past. She warned that central banks will need to use their autonomy effectively to address the challenges posed by increased inflation volatility and shocks in the future. The fragmentation of global trade and capital flows has led to reduced trade and finance, affecting both emerging market and advanced economies negatively.

She explained that while a division of the global economy into two blocs might not be destabilizing, the current trend of disengagement poses significant challenges. Moves towards bringing supply chains closer to home and forming partnerships with friendly nations are contributing to a more volatile environment. Mann argued that the benefits of global disengagement are being overestimated, and the consequences of this shift are significant but not thoroughly considered.

In conclusion, Mann highlighted that central banks need to be more vigilant as inflation shocks become more frequent due to increased volatility caused by global disengagement trends. While some may view these trends as beneficial in terms of economic sovereignty, they pose significant challenges for maintaining stability in both emerging markets and advanced economies alike.