Reaction Paper 3

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Course: International Political Economy Reaction Paper - The Monetary Tightening Trap
The Monetary Tightening Trap - Reaction Paper Introduction The article that I am going to discuss, sheds light on the soaring commodity prices across the world and the approaches that are being followed to tame these increasing prices. This article is written by Miss Jayati Ghosh, a member of the UN Secretary-General's High-Level Advisory Board on Effective Multilateralism and Professor of Economics at the University of Massachusetts Amherst. The article is taken from Project Syndicate. The inflation rate across the globe is soaring drastically and the only approach to control these soaring prices as perceived by the Governments and central banks in the US and Europe is increasing the interest rates. The article calls this increasing interest policy 'The monetary tightening trap'. The author has an opinion that this policy of increasing the interest rates to tame inflation is failed already and this 'misguided over-reliance on rate increases' as termed by the author, can push middle-income countries to the despair of economic disaster. The monetary tightening policy that is being followed by the central banks of Europe and the USA today, takes insight from policies followed by Paul Volcker in the year 1979. Paul Volcker chaired the US Federal Reserve in 1979, and he increased interest rates to control inflation. Volcker's aim behind implementing this monetary tightening policy was to reduce the bargaining power of workers by reducing the wage price and increasing unemployment. However, the policy didn't settle well and it affected the economic activities of the country. After the great depression, this phase is considered the largest upset in the economic activity of the country.
The policy didn't only affect the economic activity of the country; it also resulted in a major economic downturn in developing countries. The effects of this policy implemented by Volcker resulted in capital flows toward the US resulting in external debt crises. It took half a decade for the economy to get back to its normal after the implementation of this inflation control policy. Economists refer to this phase as a 'Lost Decade' for the developing countries of the world and for Latin America as well. The scenario of when Volcker implemented this policy and the current economic situation is quite different. As of now, wage increases are not the only factors driving the increasing prices. Even though the wage rates have declined in the past few years and we have also experienced a wave of unemployment, the inflation rate is still on the rise. Following the uncontrollable prices, some economic experts have come forward to address the economic unrest. They have argued that inflation is being driven by other factors thus, tightening the monetary policy is not the option to tame the inflation rate. They have further argued that this policy may even have an adverse impact on the economy and it can obliterate the livelihood of millions of people both inside and outside the country. To tackle such a scenario where inflation doesn't seem to settle any soon, the bigger player in the economy, like the national policymakers and multilateral institutions should intervene to come up with alternative strategies to control the economic unrest. However, global macroeconomic policymakers don't seem to take interest in this cause. The monetary tightening policies of the US and Europe will greatly impact the economies of developing countries. Increased interest rates in the US and Europe will result in debt crises and defaults in developing countries. It will ultimately result in unemployment and poverty. The
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