Fiscal policymakers also face a difficult choice - Stagflation Tapering Roubini
A stagflationary negative supply shock poses a dilemma for central bankers. Because they care about anchoring inflation expectations, they need to normalize monetary policy quickly, even though that will lead to a further slowdown and possibly a recession.
But because they also care about growth, they need to proceed slowly with policy normalization, even though that risks de-anchoring inflation expectations and triggering a wage-price spiral.
But another risk is that monetary policy will be constrained by the threat of a debt trap.
With private and public debt levels at historic highs as a share of GDP, central bankers can take policy normalization only so far before risking a financial crash in debt and equity markets.
Project Syndicate 30 March 2022
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