## PICTURE THIS — FORCES AT PLAY

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**Canonical URL:** [PICTURE THIS — FORCES AT PLAY](https://www.imf.org/-/media/files/publications/fandd/article/2023/march/picture-this-forces-at-play.pdf)

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### Remote work
- Remote work shapes inflationary conditions through two channels: the supply of labor and its productivity.
- Remote work tends to increase the amount of working hours households can supply: workers are willing to take a pay cut when allowed to work a given job remotely.
- Certain jobs cannot be performed as efficiently in a remote setting, which reduces productivity per worker-hour.
- If the reduction in productivity outweighs the increased supply of labor, firms’ marginal costs rise and generate inflationary pressure.
- The productivity channel also affects households’ demand: lower productivity leads workers to anticipate lower future wages, causing them to reduce their demand for goods and exerting a downward force on prices.
- Policy implication: How these opposing forces play out will shape demands on monetary policy.
- Key statistic: Remote work has increased by 44 percent over the past 5 years.

### The green transition
- The green transition requires a substantial reallocation of resources away from fossil fuels toward renewable sources of energy—mainly wind and solar.
- The transition will likely require a large increase in investment, possibly encouraged by some form of subsidy.
- Increased investment demand will tend to increase the natural level of interest rates.
- Policy implication: The green transition will probably require central banks to support a higher policy rate.
- Key statistic: Annual clean energy investment will need to reach $4 trillion by 2030 to get to net zero emissions by 2050.

### Central bank digital currency (CBDC)
- CBDC will allow central banks to directly set the rate of interest paid by CBDC, permitting them to transmit monetary policy directly to households rather than indirectly through banks.
- Banks do not fully transmit rate changes (especially increases) to households; an increase in the policy rate does not lead to a one-for-one increase in deposit rates.
- If central banks issue digital currency directly to households, they will likely have to expand their balance sheets permanently.
- Central banks’ enlarged portfolios could be invested in government bonds (providing strong support to fiscal policy) or lent to the private sector (driving investment in specific industries).
- Policy implication: Central banks will have to manage their reputation for independence carefully, because investment decisions could be politically fraught.
- Key statistic: More than 100 countries are currently exploring CBDC.

### Demographics
- An aging population will lower demand as individuals save for retirement, which will temporarily reduce the natural level of interest rates.
- On the supply side, declining labor force participation will reduce potential output and result in slower income growth that incentivizes individuals to save for the future.
- After the transition to an older population is complete, saving pressure may abate: the retired tend to consume from savings at a high rate, and labor force participation will stabilize.
- Long-run outlook: It is not clear that demographic change will lead to permanently lower real interest rates or deflation, or what the precise effect on monetary policy will be.
- Key statistic: The number of people in the world over 60 years old will double by 2050.

### De-globalization
- De-globalization tends to impoverish countries by creating barriers to trade and encouraging reallocation of resources toward less-efficient industries.
- A drop in output can reduce government revenues and cause fiscally driven inflation if the government does not reduce spending and/or increases taxes.
- Supply and demand effects will add inflationary forces; the strength depends on whether a country is primarily an importer or exporter.
  - Importers will find it more difficult to purchase goods from abroad, creating inflationary pressure at home.
  - Exporters will anticipate lower future income from foreign sales, causing household demand to fall.
- Key statistic: Trade openness peaked at about 60 percent in 2008 and has fallen since then.

*Prepared by F&D staff based on research by Markus K. Brunnermeier of Princeton University.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2023/march/picture-this-forces-at-play.pdf_