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Ivan Werning @ivanwerning.bsky.social · Sep 6

Here is a video of this presentation on Tariffs and the best monetary policy response:

www.youtube.com/live/DoFrOjJ...

Ivan Werning @ivanwerning.bsky.social · Jul 26

Workshop in International Macro
📣 Call for Papers 📣
Montevideo, Uruguay, Dec 10-11

Keynote: Ricardo Caballero

Submit your paper: digitatics.typeform.com/to/rUqHU5hOh...

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Ivan Werning @ivanwerning.bsky.social · Jun 9

Final thought...

Optimal Currency Area literature (Mundell) studied when a common currency is not too costly for stabilization.

But if coordination is valuable, our mechanism says a common currency can be strict benefit!

So maybe the Euro was a good idea?... 🤔

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Ivan Werning @ivanwerning.bsky.social · Jun 9

Unlike most prior work on issues of coordination...

Our results are not driven by traditional beggar-thy-neighbor (on output, not inflation as here) nor by terms-of-trade-effects (market power, our countries take global price as given).

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Ivan Werning @ivanwerning.bsky.social · Jun 9

This leads to what we call an expansionary bias.

In response to a negative supply shock (say, an oil shock), decentralized monetary policy is too loose.
Inflation is too high, output too high. Relative to the coordinated optimum.

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Ivan Werning @ivanwerning.bsky.social · Jun 9

Pictures speak louder than words... (Q is the global input price).

Equilibrium must be on red line: world Phillips curve...

...yet countries think they can deviate along the flatter blue line...

...but all that does is raise the price Q and shift their curve! 😳

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Ivan Werning @ivanwerning.bsky.social · Jun 9

Intuitive step #1: we show world Phillips curve is typically steeper than the individual country's Phillips curve.

Each central bank thinks 💭 “The cost of lowering inflation is too damn high.”

An ideal world planner 💭 “No! Those global supply disruptions are relative!”

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Ivan Werning @ivanwerning.bsky.social · Jun 9

Thus, we uncover an inflationary externality:

Higher output → higher global input demand → higher global input prices → higher global inflation 😭

No country internalizes this feedback.

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Ivan Werning @ivanwerning.bsky.social · Jun 9

Key mechanism...

1. Each country takes the world input price (that rises!) as given
2. But jointly, they are affecting it!

Result: Countries do not internalize that by tightening more, they could (collectively) lower the supply in the input. Ergo, they don't tighten enough!
6/N

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Ivan Werning @ivanwerning.bsky.social · Jun 9

This turns out to be key and imply that well-acting independent central banks can respond in a manner that creates global inflation.

We model a world with...
– Symmetric small open economies
– Wage & price rigidity (both key)
– A global input (e.g. oil) with world price

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Ivan Werning @ivanwerning.bsky.social · Jun 9

Our perspective is that this misses a key mechanism that operates during global shocks.

There is little doubt that the recent inflation had two features: it was global in nature (similar across countries), coincided with supply shocks (energy prices, shipping costs etc).

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Ivan Werning @ivanwerning.bsky.social · Jun 9

This flips the usual narrative. For example, here is Maurice Obstfeld...

"by simultaneously all going in the same direction, they risk reinforcing each other’s policy impacts without taking that feedback loop into account. The highly globalized nature of today’s world economy amplifies the risk."

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Ivan Werning @ivanwerning.bsky.social · Jun 9

🚨New paper with Veronica Guerrieri and Guido Lorenzoni

Was the recent inflation surge due to a lack of coordination? Can lack of coordination lead to too much inflation?

Yes, we show. Especially in response to global supply shocks.

link to paper: economics.mit.edu/sites/defaul...

1/n🧵

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Ivan Werning @ivanwerning.bsky.social · Jun 5

MIT Economics obituary for the legendary Stan Fischer:

t.co/8fgZbnaRCB

https://news.mit.edu/2025/stanley-fischer-towering-figure-economics-dies-0603

t.co

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Ivan Werning @ivanwerning.bsky.social · May 13

Adding an atlernative non-NBER link in case anyone has trouble with that
economics.mit.edu/sites/defaul...

economics.mit.edu