An IMF Seminar with Gita Gopinath, Olivier Blanchard, Mohamed A. El-Erian, Chang Yong Rhee, and Silvana Tenreyro, moderated by Tom Keene.

Friday, April 14, 2023


While headline inflation is falling, core inflation remains stubbornly high. But central banks must stay the course in bringing this metric down while keeping the financial system stable, the IMF’s Gita Gopinath told a seminar during the IMF’s Spring Meetings last week.

Many countries have responded by raising interest rates, but some reacted late, panelists said. If the United States had started earlier, “we would not be in the midst of this trilemma of trying to simultaneously lower inflation, minimize damage to growth, and maintain financial stability,” Cambridge University’s Mohamed El-Erian said. Policymakers must now contend with a financial system conditioned to “low for long” rates adjusting to a world of “higher for longer.”

Should central banks aim for inflation higher than 2 percent, the target of many central banks? Olivier Blanchard, of the Peterson Institute for International Economics, said he has long favored a higher target, which would give monetary policy more scope to adjust.

Similarly, forward guidance—when central banks announce policy action in advance—provides certainty about monetary policy direction, but it can tie policymakers’ hands. “We need escape clauses for when things change” and a different course of action becomes necessary, Gopinath said.

Moderator Tom Keene wondered whether a general policy on battling inflation was even possible, given the range of inflation narratives: “Is it every central bank for itself?”

Supply shocks aren’t going away in a hurry, panelists said, which means monetary policy will face more serious tradeoffs than before.

But the lesson is to let these shocks happen and not fight them too hard, Blanchard said. “If the central banks have built credibility, they won’t suffer second round effects.”

Link to the IMF Seminar of April 14, 2023