Conclusion: coping with risks, today and tomorrow

The best bet for next year is that strong, non-inflationary growth will continue. Yet there are considerable uncertainties and associated risks, not least concerning inflationary pressures on the one hand, and a possible unwinding of accumulated economic and financial imbalances on the other. These could lead to financial market turbulence or a long period of relatively slower global growth developments, or both. Fortunately, policies might be suggested that could reduce these risks materially. While the current phase of monetary tightening seems clearly justified, the issue of how higher rates and financial imbalances might interact needs careful consideration. This is particularly so against a backdrop of globalisation and shifts in relative prices which have, in any event, made it more difficult to gauge how much tightening is actually required. The burden placed on monetary policy, and the associated risks, could be reduced by concurrent fiscal tightening, particularly in countries like the United States with large current account deficits. Such support would also help reduce the risk of disorderly exchange rate movements. Structural reforms to aid internal adjustments between the tradable and non-tradable sectors in various countries would serve the same purpose.

Looking further ahead, two policy questions present themselves. First, how should policy respond, were some of the current risks to materialise? It is concluded that some preparatory work would pay dividends, particularly since all of the possible policy responses in that event would seem to have both advantages and disadvantages. For example, lowering interest rates again might or might not stimulate aggregate demand, given high debt levels, but would also have negative supply side effects over time. Second, looking still further ahead, how could our policy frameworks be adapted to minimise the likelihood of today's problems of imbalances being repeated in the future? It is concluded that price stability should be pursued more flexibly and using a longer forecast horizon than is currently fashionable, and that more weight should be given to indicators of rising imbalances in conducting monetary policy.