[Square] Overcoming the Stagnant Inflation Crisis Through Humble Brainstorming

Park Yang-su, Director of the Economic Research Institute at the Bank of Korea

Many people say that history repeats itself, and scholars like Minsky have argued that financial crises are bound to recur. Some claim that problems we already know about do not lead to crises. Why do these contradictory statements coexist? It seems to be due to the limits of human intellectual capacity and bounded rationality. Humans cannot fully understand the order of nature, and even if they have a lot of information, they lack the ability or energy to process it properly. Even if they have the energy to process it, it is not easy to break free from the evolutionary constraint of simply trusting and following the leader’s judgment in order to reserve strength to counter attacks from enemies.

Some business cycle researchers view the current economic situation as the result of a combination of various types of cycles (or cyclical fluctuations). Long cycles of over 50 years are related to technological progress and the like. Financial crises that repeat every 10 to 30 years are connected to people’s memory; when people forget the pain of crises, excessive optimism forms, leading to a crisis. Cycles within 10 years relate to corporate investment behavior, and 4 to 5-year cycles are associated with elections.

Even if the world moves according to their claims, who can accurately predict the overall business cycle that appears as a combination of so many cyclical fluctuations simultaneously? Even artificial intelligence based on supercomputers that utilizes all accumulated human knowledge is still likely to fail in accurate prediction due to unknown cyclical fluctuations. How about ordinary economic agents who have relatively less economic analysis ability? They will entrust their judgment to economic scholars or policymakers or trust the words of top leaders and conduct economic activities accordingly.

Globally, high inflation continues, and the U.S. Federal Reserve is aggressively raising interest rates. The Russia-Ukraine war does not seem to end easily, recession concerns are gradually increasing, and financial markets remain unstable. Until recently, leading economic scholars and policymakers predicted that this inflation would be temporary, and the general public believed their forecasts. Those predictions missed the mark, resulting in turmoil in financial markets and suffering for many people.

In fact, we already know from experiences such as World War II and the 1970s oil shocks that when fiscal spending and money supply increase significantly and supply-side shocks add on, high inflation occurs. So why were we unable to predict the high inflation phenomenon occurring for the first time in decades? It could be due to unexpected consecutive supply-side shocks, or because inflation did not occur despite large amounts of money being injected after the global financial crisis, leading to the assumption that it would not happen this time either. Alternatively, global scholars and policymakers may have fallen into intellectual arrogance, lost humility, and been too bold in their predictions.

At this moment when many economic agents are anxious, how can economic experts and policymakers overcome this difficulty? In fact, restoring trust damaged by past mistakes is the top priority, and this is possible when they adopt an attitude of learning and analyzing diligently, preparing countermeasures firmly but without delay. In other words, when humble policymakers and experts gather to brainstorm and derive the best measures to implement, and when ordinary economic agents trust and follow their judgments, the crisis can be overcome. The current high inflation crisis can be overcome by deriving the best outlook through brainstorming and pushing forward bold policy responses to control private sector inflation expectations.

Yangsoo Park, Director of Economic Research Institute, Bank of Korea