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Do the breadth and intensity of the tightening of monetary conditions affect their impact on the global economy?

In: CNB Global Economic Outlook - January 2023

Author

Listed:
  • Sona Benecka
  • Martin Kabrt
  • Lubos Komarek
  • Petr Polak
Abstract
2021 and 2022 saw one of the most across-the-board and abrupt episodes of the tightening of global monetary conditions in history. This article examines the consequences of the synchronisation and abrupt nature of this tightening. First, synchronisation complicates the reduction of inflation through the exchange rate channel of monetary policy which, unlike other channels, is zero-sum in global terms. Theoretically, an uncoordinated "competition" for a share of this sum may cause central bankers to engage in excessive global tightening. However, in practice, central banks do not pass on inflation to each other through attempts of making their own currency exchange rates stronger, but rather dampen the spillover effects of US monetary policy, which has a huge effect on global financial conditions. Second, the article demonstrates that the unusual pace of tightening may not pass through to the real economy proportionately quickly. A slower transmission may tempt central banks to intervene again and tighten monetary conditions too much at the end.

Suggested Citation

  • Sona Benecka & Martin Kabrt & Lubos Komarek & Petr Polak, 2023. "Do the breadth and intensity of the tightening of monetary conditions affect their impact on the global economy?," Occasional Publications - Chapters in Edited Volumes, in: CNB Global Economic Outlook - January 2023, pages 14-19, Czech National Bank.
    • Handle: RePEc:cnb:ocpubc:geo2023/1
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