The IMF recommends tightening fiscal policies to help reduce inflation

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The International Monetary Fund (IMF) published on Monday an excerpt from the chapter of the “Fiscal Monitor” report related to fiscal policy. In it, the international organization focused on government spending as responsible for rising inflation.

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In this sense, recommended the IMF tightening fiscal policies to help reduce inflationwhich are compensated with incentives for the weakest groups, to prevent the full weight of price containment measures from falling on interest rate hikes.

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

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

The full report will be released next week as part of the spring meetings held in Washington by the IMF and the World Bank.

with the title “Inflation and Disinflation: What Role for Fiscal Policy?”a team of IMF analysts, led by Marcos Poplawski and Carlos Gonçalves, analyzed the impact of inflation on public finances. There they offer a number of recommendations to lower the prices.

The main advice was the aforementioned tax tightening, albeit accompanied by “targeted cash transfers to the most vulnerable sections of the population”Mauro specifies.

“If you provide that specific support, you not only dampen the impact on the consumption of the poorbut also mitigates the effects on general consumption of the economy, so it’s 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 fight inflation, takes note of the report.

In the context of the “strongest rise in inflation in three decades”, analyzes the report 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 wage 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.

In addition, the rapid increase in food prices relative to other prices “disproportionately harms poor families” because food accounts for a larger percentage of their total consumption.

The wealth redistributive effects of inflation were also influenced by the age of the head of household, with young households, which tended to be net borrowers, recording gains through wealth channels, while older households saw their wealth eroded.

The report also discusses how inflation erodes the real value of public debt. In countries with more than 50% debt, inflation reduces public debt by 0.6 percentage points, an effect that lasts for several years.

However, as inflation becomes persistent and better predicted, it stops helping to reduce debt-to-GDP ratios.

With information from the EFE agency

Source: Clarin

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