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What really drives public debt

What really drives public debt

Through the Global Crisis, sovereign debt-to-GDP ratios grew substantially when confronted with shocks to growth, increased fiscal deficits, bank recapitalisation costs, and rising borrowing costs. This column talks about how these various shocks connect to one another to exacerbate or mitigate the eventual effect on debt. Selection of monetary policy regime can be an important determinant of how public debt reacts to these shocks.

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What really drives inflation

What really drives inflation

In a recently available speech in Jackson Hole, Fed Chair Jay Powell organized the Fed’s new monetary policy framework. Under this framework, the Fed allows inflation to perform above its 2% target to be able to boost employment carrying out a downturn. The brand new framework marks a departure from the perceived wisdom of the 1970s’ Great Inflation. Under this perceived wisdom, the Fed must respond aggressively to rising inflation or risk losing its credibility and letting inflation spiral uncontrollable. New research on the fantastic Inflation challenges this perceived wisdom and will be offering a fresh explanation for what really drives inflation. Rather than Fed credibility, this explanation puts the economic climate and how it transmits monetary policy front and centre. In doing this, it reconciles the 1970s with the existing environment and a foundation for understanding why the Fed’s new framework is unlikely to trigger runaway inflation.