Are there any policy tools major Central Banks can coordinate on to combat global inflation?

If so, what form could this take? If not, what actions do you believe policy makers can enact to combat inflation?

The current bout of global inflation can be split into two categories: demand push and supply pull. Central banks are equipped to handle demand push inflation by increasing interest rates and making the cost of borrowing money more expensive – that is a direct link towards the demand side of the global economy and that has started in earnest with the Federal Reserve hiking rates more aggressively now than in a generation, with many other central banks following its lead (CA, AU, NZ, UK, even EU). For the supply side of the economy, there is little a central bank can do since it boils down to inventory production and transportation – two realms that are unrelated to monetary policy. What central banks can do is urge more fiscal policy to aid this sector.

There’s a high degree of price synchronization across economies: i) common commodity price and supply chain shocks hitting countries simultaneously; ii) regional shocks strong enough to affect all countries, e.g. Ukraine & excess US fiscal stimulus. Central banks (CBs) have no policy mandate to target global inflation and no specific alternative tools for this. CBs are concerned with second-round inflation effects, such as wage rises beyond productivity and unanchoring of long-term price expectations. Second-round effects have different dynamics in different economies. A global response would be inappropriate and damaging. CB policy has little impact on first-round effects such as commodity price shocks. Addressing global inflation will come down to major economies’ CBs pursuing domestic inflation-targeting mandates.

First, there is the rate-hike instrument that needs to be coordinated among major central banks. Timing and pace of tightening through rate hikes is important, otherwise inflation will just transfer from one economy to another, as capital flows move. Obviously, this comes with sacrificing growth. Second, taming major fluctuations in the FX markets could be another coordinated policy response to high inflation, even if there might be negative effects on balance of payments. Major central banks should stop liquidity injections and government bond purchases, which would force banks to increase rates on deposits, thus attracting liquidity from a boost in savings.