How Should central banks Coordinate Monetary Policy

Why do you care? The price of goods and services is rising, and everyone is affected somehow. What can central banks do? This article looks at ways in which central banks are cooperating across the world.

Introduction

The COVID-19 pandemic has illustrated that the world is increasingly connected and interdependent. As governments imposed lockdowns and closed their borders, the price of basic goods and services rose. More recently, Russia’s illegal invasion of Ukraine illustrates this point. Prices are rising due to a mix of high commodity and oil prices, supply chain bottlenecks, and high levels of employment across most developed economies. While consumers are faced with high prices, central banks are forced to act by raising interest rates. However, the persistence and exogenous nature of inflation suggest that the nature of future risks will be shared and more pernicious. Central banks must act to stave off runaway inflation and anticipate future risks.

Uncertain energy prices will impact inflation over the long-run

Prior to the COVID-19 pandemic, governments across the world legislated a transition toward a green economy, supported by renewable energy. The 2008 Climate Change Act made Britain the first country in the world to set legally binding ‘carbon budgets’, aiming to cut UK emissions by 34% by 2020 and at least 80% by 2050 through investment in energy efficiency and clean energy technologies such as renewables, nuclear and carbon capture and storage. This strategy sets out policies and proposals for decarbonizing all sectors of the UK economy to meet our net-zero target by 2050.

In June 2021, the EU adopted a European Climate Law, establishing the aim of reaching net-zero greenhouse gas emissions (GHG) in the EU by 2050. The law sets an intermediate target of reducing GHG by at least 55% by 2030 compared to 1990 levels. Supply chain issues will have lingering effects on the prices of goods and services

As such, businesses began investing less in refinery capacity as they began phasing out crude oil for renewable energy. The Russia-Ukraine war caused oil prices to rise suddenly, and there was not enough capacity to meet the demand for oil prices. As such, oil prices have reached multi-year highs with…