Structural shifts demand a new central banking mindset

While the primary objective of most central banks — maintaining price stability — remains unchanged, the post-pandemic economic landscape has evolved in ways that require policymakers to rethink how monetary policy is designed and implemented. The relatively stable economic environment of the past few decades has come to an end. We have now entered a period characterized by profound structural changes driven by geopolitical fragmentation, technological innovation, demographic shifts and climate change. Furthermore, supply shocks have become more frequent and more persistent since 2020.

These forces are reshaping inflation dynamics, impacting economy’s growth potential, and altering monetary policy transmission mechanisms. Consequently, central bankers will need to exhibit greater flexibility, adaptability, and forward-looking decision-making.

Examining the major paradigm shifts since the early 1980s helps illuminate the extent to which the current environment differs from that experienced over the prior four decades. During the Great Moderation era (1984-2007), inflation remained low and predictable, GDP growth exhibited less volatility while remaining solid (expansions were long and were interrupted only by a few mild recessions), globalization expanded trade, and central banks could rely on well-established economic relationships when setting interest rates. 

During this phase, leading central banks concluded that credible commitments to low and stable inflation, often through explicit or implicit inflation-targeting frameworks, had made the economy more stable. It was widely presumed that expectations of inflation had become well-anchored, making it easier to maintain price stability with relatively small policy adjustments. 

The 2007-08 global financial crisis challenged some of the underlying assumptions formed during the Great Moderation era. It became apparent that price........

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