Monetary Policy Challenges in a Volatile World

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.