IMF recommends fiscal tightening to help lower inflation

The International Monetary Fund (IMF) on Monday recommended fiscal tightening policies to help lower inflation, which are offset by incentives for the most vulnerable groups, to prevent the full weight of the measures to contain prices from falling on increases in prices. interest rates.

“Fiscal tightening is appropriate in many countries because public debts are high and because with a high inflation it will be possible to reduce demand in the economy and, therefore, inflationary pressures will be reduced”, he pointed out in a talk with the media Paolo Maurodeputy director of the fund’s tax affairs department.

With this, he added, “the need for central banks to raise interest rates as much”. “Of course, central banks will probably still have to keep raising interest rates a bit, but not as much as in the absence of fiscal restraints.”, he added.

The IMF advanced this Monday a chapter of its Fiscal Monitor, which it will publish in its entirety next week, within the framework of the spring meetings held in Washington by the IMF and the World Bank.

With the title “Inflation and disinflation: What role does fiscal policy have?”, a team of analysts from the IMFled by Marcos Poplawski and Carlos Gonçalvesanalyze the impact of inflation on public finances and offer a series of recommendations for lowering prices.

The main advice, the aforementioned fiscal tightening, although accompanied by “targeted cash transfers to the most vulnerable groups of the populationMauro specified.

“If one provides that specific support, it not only dampens the effects on consumption of the poor, but also dampens the effects on consumption in the economy as a whole, so it is a good decision to combine fiscal policy and monetary policy.”, he added.

When central banks act alone, without the support of fiscal policy, they need to raise interest rates substantially to combat inflation, the report says.

Within the framework of “sharpest rise in inflation in three decades”, the report looks at how inflation affects various segments of society in different places.

Based on public surveys of thousands of households in six economies (Colombia, Finland, France, Kenya, Mexico, and Senegal), the IMF found that inflation from mid-2021 to mid-2022 impacted people through three main channels. : your consumption pattern, your salary income, pensions or transfers and your assets and liabilities.

The effect was more pronounced in low-income countries, while inflation eroded real incomes in commodity-importing countries.

Likewise, the rapid increase in food prices compared to other prices “hurts poor families disproportionately” because food represents a larger proportion of their total consumption.

The wealth redistributive effects of inflation were also influenced by the age of the household head, with young families, who tend to be net borrowers, experiencing gains through wealth channels, while households made up of the elderly saw eroded their wealth.

The report also analyzes how inflation erodes the real value of public debt. In countries with a debt greater than 50% of GDP, calculate the IMFeach percentage point of unexpected increase (“surprise”) of inflation reduces public debt by 0.6 percentage points, an effect that lasts for several years.

However, as inflation becomes persistent and better anticipated, it stops contributing to lower debt ratios.

Source: EFE