The supply side is back on policy radars across much of the world

Source– The post is based on the article “The supply side is back on policy radars across much of the world” published in the Mint on 7th September 2022.

Syllabus: GS-3 – Indian economy and issues related to growth

News- There is increased focus of central banks and economies towards the sharp increase in inflation and supply side constraints faced by economies across the world. These were the main focus areas of  recently held central bankers meeting at Jackson Hole.

What was the practice followed by central bankers to conduct monetary policy in recent times?

Main focus area of monetary policy, especially in advanced economies, has been to manage aggregate demand.

It has been assumed that the supply side would easily adapt to change in aggregate demand as the rise of China expanded labor supply and productive capacity on a global scale.

Temporary supply side disruptions were ignored as steady inflationary expectation and responsive supply side would not lead to higher wages and higher prices.

The moderate level of inflation ensured that the government could provide fiscal stimulus to boost the economy.

How has the scenario changed in the last two years?

Many of the monetary policy assumptions have been challenged due to supply side disruptions, rising energy prices and issues related to food shortage.

The situation may persist due to geopolitical tensions and rising protectionism across the world. The prominent economist and bankers are talking about rising inflationary pressure and supply side constraints.

What are the important questions raised by the current scenario?

Whether the rigid supply side situation will persist and rise of protectionist sentiment will lead to loss of resilience for the world economy as a whole.

Second is related to supply shocks as the world will learn to adapt to climate change and transition to new forms of mobility, energy and living.

Third is related to the actual micro structure of the economy. Recently the shortage of semiconductors has upset the production of car companies across the world. The complex supply chain across world is vulnerable to shocks even if one link of chain breaks