Lancaster University Management School - 54 Degrees Issue 15

Formany years, new figures and issues concerningmacroeconomics have been covered in newspapers, onTVand –more recently – on social media. Recessions, market surges – and falls – and government policies fill column inches, can lead news bulletins, and provoke discussionswith contacts and friends. But even if there have been spikes of engagement with the world of macroeconomics, general interest in such issues and questions has never been as high as it is now. The recent economic slump triggered by the Covid-19 pandemic has severely affected both consumers and businesses. Meanwhile, governments and central banks have been asked to react promptly to alleviate disruptions to the real economy. Then, after two difficult years, as most of the world’s advanced countries started their recovery from the pandemic’s economic effects, a huge surge in inflation and the further geopolitical consequences of the Russia-Ukraine war have posed new challenges for their recoveries. Covid’s globe-spanning consequences of lockdowns and an entire shift in the way businesses, governments and societies operated led policymakers to address the slow pace of economies in a context of extremely low-interest rates. But just as some nations started to return to life in a way more like that pre-pandemic, the scenario suddenly changed for them once again with the Russian invasion of Ukraine. Skyrocketing prices for consumer goods and commodities – from fuel supplies to our homes and for our vehicles to products on the shelves of our local supermarket – imply new challenges for policymaking. Here in the UK, for instance, the rise in the Consumer Prices Index during the first months of 2022 has been the highest it has been in the last 30 years. In this new economic scenario, policy measures will adapt to address rising inflation without curbing the economic recovery that was still under way from the pandemic. ENVIRONMENTAL CONCERNS Meanwhile, there is growing evidence suggesting the period of relative climate stability is ending. The links between the economy and climate issues are by nature complex and mutating. Many different sectors and industries are expected to be adversely affected by climate change, creating new challenges for both local and global policymaking. Future scenarios are characterised by great uncertainty about the policies to be implemented to mitigate the consequences of climate change, and substantial changes in the structure of the economy are likely to be undertaken. For example, global warming is associated with damaging climatic events that may impact specific prices, notably food, energy, and commodity prices, and thus inflation. Furthermore, higher temperatures may dampen economic activity and reduce labour productivity, and this may reduce long-term growth potential and equilibrium interest rates, restricting the available space for conventional monetary policy. Although central banks are not the primary actors in the fight to prevent climate change, they can play an important supporting role for price stability and in the transition to netzero gas emissions. For example, both the European Central Bank and the Bank of England include a climate action plan in their agendas. A global call for answers to these challenges is feeding a fast-expanding strand of macroeconomic research focused on estimating, modelling, and quantifying interactions between climate change, policymaking, and the financial system. Moreover, the uncertainty generated in this situation will affect the economic response to recovery measures. Studying the effects of uncertainty on policy transmission and business dynamism is one of the key challenges for modern macroeconomic research. 8 |

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