Pandemic and Ukraine War Prompts Reassessment of Nation’s Economy and Monetary Policy

While supply has been highly elastic and inflation low and relatively stable over the past several decades, there are lessons to be learned following a “series of supply shocks” associated with the pandemic and Russia’s war against Ukraine which have contributed to high inflation, in combination with a very rapid recovery in demand. “The challenges for monetary policy in responding to a protracted series of adverse supply shocks became highlighted over the past few years, the recent speech by Vice Chair Lael Brainard further pointing out that “the lower elasticity of supply we have seen recently could become more common due to challenges such as demographics, deglobalization, and climate change.” In an environment of high uncertainty, it becomes even more challenging to assess potential output and the output gap in real time despite the principles of monetary policy appearing relatively straightforward in theory.