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Opening Statement

Hi all, we will be speaking against the motion: "The Fed is responsible for the global inflation
volatility in the last 5 years."

From 2018 to 2023, the world has witnessed significant inflation volatility. In 2020, the global
inflation rate averaged around 3.2%, but by 2021, it spiked to approximately 4.7%. This period
also saw significant variance among markets, with some countries experiencing double-digit
inflation.

This 5-year period was marked by various global events and disruptions. The COVID-19
pandemic, beginning in early 2020, caused severe supply chain disruptions, labour shortages, and
demand-supply mismatches. For instance, Brazil's inflation rate jumped from 3.75% in 2018 to
over 10% in 2021, driven by both domestic factors and global commodity price changes.

Geopolitical factors have also played a crucial role. The Russia-Ukraine conflict, which escalated
in 2022, led to a sharp rise in energy and commodity prices.

Domestic fiscal and monetary policies across various countries have been pivotal in shaping
inflation dynamics. For instance, in India, RBI has implemented various measures to control
inflation, such as adjusting the repo rate and managing liquidity through open market operations.

Furthermore, economic theories such as the Quantity Theory of Money suggest that inflation is
closely tied to the money supply and velocity within a given economy. Many countries increased
their money supply significantly to mitigate the economic impact of the pandemic, leading to
inflationary pressures independent of U.S. monetary policy. The Taylor Rule, which guides
central banks in seItting interest rates based on inflation and economic output, shows that many
emerging markets had to set their policies according to their specific economic conditions, often
diverging from the Fed's approach.

While it is undeniable that the Federal Reserve's policies, such as quantitative easing (QE) and
interest rate adjustments, have global ramifications, these actions are not the primary drivers of
the recent global inflation volatility. The Fed's mandate is to manage U.S. inflation and
employment, and while its policies influence global financial conditions, they are just one part of
a larger, more complex picture. The evidence instead points to a combination of global supply
chain disruptions, significant geopolitical events, and varied domestic policies as the primary
drivers of inflation over the past five years.

Geopolitical Events and Commodity Price Shocks and Global Supply Chain Disruptions

Building on Vanshika’s point, I’ll elaborate on effects of global supply chain disruptions and
geopolitical events.
COVID-19 pandemic caused unprecedented disruptions to global supply chains, significantly
contributing to inflation volatility worldwide. For example, the Consumer Price Index (CPI) in
many countries saw significant increases in 2021 due to these supply chain issues. The World
Bank reported that pandemic-induced disruptions added approximately 2-3 percentage points to
global inflation in 2021 alone. This inflation was driven primarily by supply-side constraints rather
than factors influenced by the Federal Reserve.

The semiconductor shortage, due to factory shutdowns in countries like Taiwan and South Korea
was a direct consequence of the pandemic. This led to increased prices for electronic goods and
automobiles globally. The International Monetary Fund (IMF) reported that the global
semiconductor shortage contributed to a 1.5% increase in global inflation in 2021.

Geopolitical events, also significantly impact global commodity prices, affecting inflation
worldwide. The Russia-Ukraine conflict led to a surge in energy prices, with crude oil prices rising
by over 50% in the first half of 2022. Energy-dependent economies faced increased production
costs, leading to higher inflation.

Natural disasters also tend to play a role. In 2020, locust swarms in East Africa devastated crops,
leading to food shortages and increased prices. According to the Food and Agriculture
Organization (FAO), these events contributed to inflation in affected regions.

As per IMF, global food prices increased by 23% in 2021 due to supply chain disruptions, adverse
weather conditions, and geopolitical tensions. Nigeria's inflation rate surged to 17% in 2021,
driven by higher food prices and supply chain disruptions.

Such events have a more direct and immediate impact on inflation volatility than the Federal
Reserve's monetary policy decisions.

Argument 2: Domestic Policy Measures

Inflation is significantly influenced by domestic fiscal and monetary policies across different
countries. Moreover, fiscal policies, such as increased government spending and subsidies,
have also played a crucial role in shaping inflation dynamics.

For e.g., The Indian government's increased spending during the COVID-19 pandemic,
including direct benefit transfers and public distribution systems, has had a direct impact
on inflation volatility. In 2020, the Indian government announced a $266 billion stimulus
package to combat the economic impact of COVID-19, which increased the fiscal deficit to
9.5%. As discussed yesterday in class, the Fiscal Responsibility and Budget Management
(FRBM) Act and its targets were disrupted due to necessary fiscal support during the
pandemic, which shows how this expansionary fiscal policy contributed to inflationary
pressures in the economy. According to the RBI's Annual Report for 2020, the increased
fiscal deficit and subsequent rise in government borrowing led to higher inflation rates,
particularly in the food and fuel sectors, where CPI reached around 6-7% growing from
roughly 3-4% in 2018.

Apart from stabilization policies, the Indian government has also undertaken various welfare
such as unemployment insurance, and infrastructure projects, which can impact inflation.
Large-scale government initiatives like the Sarva Shiksha Abhiyan, infrastructure projects,
and the Pradhan Mantri Awas Yojana have increased public expenditure, influencing
inflation independently of the Fed's actions

Similarly, in countries like Argentina, excessive money printing to finance budget deficits has
led to high inflation rates, independent of the Fed's actions. Argentina's inflation rate
exceeded 50% in 2021, driven primarily by domestic monetary policies and fiscal
mismanagement. These examples underscore that domestic policy decisions are critical
drivers of inflation across various countries.

Furthermore, countries like Turkey have experienced high inflation rates due to domestic
policy missteps. In 2021, Turkey's inflation rate soared to over 36%, the highest in two
decades, largely due to unorthodox monetary policies, including repeated interest rate cuts
despite rising inflation. The Central Bank of Turkey's policy decisions, rather than the Fed's
actions, were the primary cause of this inflation surge.

Apart from local fiscal and monetary policies, the Phillips Curve concept helps us
understand that inflation can be driven by factors such as unemployment and wage changes
within an economy, further underscoring the role of local dynamics over external influences
like the Fed's policies.

Closing Statement

In conclusion, the assertion that the Federal Reserve is responsible for global inflation volatility
over the last five years is overly simplistic and unsupported by a comprehensive examination of
the evidence. Inflation volatility worldwide has been driven by a complex interplay of diverse
factors that go far beyond the Federal Reserve's monetary policies.

First, the COVID-19 pandemic caused unprecedented disruptions to global supply chains.
Lockdowns, factory shutdowns, and transportation bottlenecks led to shortages of essential goods,
skyrocketing shipping costs, and significant delays. For instance, global container shipping rates
surged by over 400% in 2021, contributing significantly to higher import costs and inflation across
various economies. These supply chain issues have been major contributors to inflation,
independent of the Fed's actions.
Second, geopolitical events have had a profound impact on global inflation. The Russia-Ukraine
conflict, for example, drove up energy prices dramatically. Brent crude oil prices rose from around
$40 per barrel in mid-2020 to over $120 per barrel in early 2022. Europe, heavily reliant on Russian
gas, saw soaring energy costs that fed into overall inflation. Similarly, global food prices surged
by 23% (World Economic Forum) in 2021 due to disruptions in Ukraine's grain exports and
sanctions on Russian agricultural products, affecting many countries reliant on these imports.

Third, domestic fiscal policies across different nations have played critical roles in influencing
inflation. Governments worldwide implemented substantial fiscal stimulus measures to mitigate
the economic impact of the pandemic. For instance, the European Union's €750 billion Next
Generation EU fund and the United States' $2.2 trillion CARES (Coronavirus Aid, Relief, and
Economic Security) Act significantly increased consumer demand and exerted inflationary
pressures.

Moreover, fluctuations in global commodity prices have been driven by factors such as OPEC's
oil production decisions, weather-related disruptions in agricultural output, and shifts in global
demand. For example, OPEC's (Organization of the Petroleum Exporting Countries) decision to
cut oil production by 9.7 million barrels per day in 2020 to stabilize the market amid plummeting
demand had lasting effects on oil prices and inflation.

Additionally, central banks in various regions, including the European Central Bank (ECB) and
the Bank of Japan (BoJ), have their own monetary policy frameworks that respond to local
economic conditions. The ECB's bond-buying program and the BoJ's negative interest rate policy
have also significantly influenced global inflation trends.

In summary, while the Federal Reserve's policies can have some indirect effects on the global
economy, they are far from the primary drivers of recent inflation volatility. The true causes lie in
a multifaceted array of global supply chain disruptions, geopolitical tensions, domestic fiscal
policies, and commodity price fluctuations. Understanding these diverse influences is crucial for
accurately addressing and managing inflation in the interconnected global economy. Therefore,
attributing global inflation volatility primarily to the Fed lacks substantial evidence and overlooks
the broader, more impactful determinants.

References

1. World Bank Report on Global Supply Chain Disruptions (2021)

2. Reserve Bank of India Annual Report (2020)
3. International Monetary Fund (IMF) Report on Global Inflation (2022)
4. Journal of Economic Perspectives (2022): "Inflation Dynamics in Emerging Markets"
5. Journal of International Money and Finance
6. Reserve Bank of India Reports (2020-2023)
7. Bank for International Settlements (BIS) Reports (2018, 2022)
8. World Bank Report on Commodity Prices (2022)
 9. Government of India Strategic Petroleum Reserves Program (2022)
10. International Monetary Fund (IMF) World Economic Outlook (2022)
11. Food and Agriculture Organization (FAO) Reports on Food Prices and Locust Infestations
(2020)
12. World Bank Report on Global Supply Chain Disruptions (2021)
13. Reserve Bank of India Annual Report (2020)
14. International Monetary Fund (IMF) Report on Global Inflation (2022)
15. Journal of Economic Perspectives (2022): "Inflation Dynamics in Emerging Markets"
16. Journal of International Money and Finance
17. Reserve Bank of India Reports (2020-2023)

Potential Counterarguments and Rebuttals

Counterargument 1: The Fed's monetary policy has global spillover effects that impact inflation
in emerging markets like India.

Rebuttal: While it is true that the Fed's monetary policy can have global spillover effects, these
effects are not the primary drivers of inflation in India. The RBI has a robust monetary policy
framework in place, including inflation targeting and interest rate adjustments, which are designed
to mitigate external shocks. Additionally, domestic factors such as fiscal policy, government
spending, and supply chain disruptions have had a more direct and significant impact on inflation
in India (06_MonetaryPolicy) .

Counterargument 2: Changes in the Fed's interest rates influence global commodity prices,
which in turn affect inflation in India.

Rebuttal: Global commodity prices are influenced by a variety of factors, including geopolitical
events, supply chain disruptions, and demand fluctuations. While the Fed's interest rate changes
can have some effect, they are not the sole determinant. For instance, the COVID-19 pandemic
caused significant disruptions in supply chains, leading to price volatility in essential goods. These
disruptions were a major factor in inflation volatility in India, independent of the Fed's actions
(07_Fiscal) (Session 05_Slides) .

Counterargument 4: The Fed's actions have led to capital flows and exchange rate volatility,
impacting inflation in India.

Rebuttal: While capital flows and exchange rate volatility can influence inflation, the RBI has
tools to manage these effects. The RBI actively intervenes in the foreign exchange market to
stabilize the rupee and uses monetary policy tools to manage inflationary pressures. Additionally,
India's inflation has been significantly impacted by domestic factors such as agricultural output,
fiscal policies, and government subsidies, which are not directly linked to the Fed's actions
(06_MonetaryPolicy) .