Monetary Policy Challenges in a Volatile World

Stefano Gnocchi and Matteo Cacciatore

No 2026-34, Staff Analytical Papers from Bank of Canada

Abstract: Rising macroeconomic volatility and structural transformations—such as deglobalization, climate risks, and rapid AI adoption—are reshaping inflation dynamics and the trade-offs faced by monetary policy. Drawing on existing literature, internal modelling, and new experimental evidence, we assess the conditions under which policymakers may accommodate supply-driven inflation. We find that the current framework retains sufficient flexibility to balance inflation and output stabilization, provided inflation expectations remain well anchored, and policy responses appropriately reflect the size and persistence of supply shocks, as well as prevailing economic conditions.

Keywords: Monetary policy; Inflation dynamics and pressures; Monetary policy framework and transmission; Structural challenges; Climate change; International trade, finance and competitiveness (search for similar items in EconPapers)
JEL-codes: E E3 E31 E32 E5 E52 E58 (search for similar items in EconPapers)
Date: 2026-07
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocsap:26-34

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