Key Details
The IMF departmental paper, Resilience amid Structural Transformations: Are Macro Policy Frameworks Fit for Purpose?, examines how demographic change, climate change, geoeconomic fragmentation and artificial intelligence could affect growth and economic policy over 2026–35.
Finding | What the paper estimates or proposes |
|---|---|
Growth effect | Under a moderate scenario, average annual per-capita growth could fall by 0.4 percentage points in advanced economies and 0.1 percentage points in emerging markets, excluding acute climate shocks. Including them raises the estimated losses to 0.7 and 0.5 percentage points, respectively. |
AI offset | AI raises projected growth but, under the paper’s assumptions, does not fully offset the combined drag from climate change, fragmentation and adverse demographic trends. |
Interactions matter | Trade barriers, restricted migration and slower diffusion of AI could subtract a further 0.4 percentage points from average annual per-capita growth in the moderate scenario. |
Fiscal pressure | Additional expenditure associated with the four transformations could average 3–4% of GDP annuallyover the next decade. |
Monetary policy | Inflation-targeting frameworks should make greater use of alternative scenarios, clarify when supply shocks can be “looked through”, and protect central-bank independence. |
External resilience | More volatile capital and trade flows may require stronger prudential safeguards, updated reserve assessments and clearer principles for using foreign-exchange intervention. |
The growth exercise covers 143 economies, while the model of maximum sustainable debt covers 128 economies. India is included in selected emerging-market modelling, but the paper does not publish a standalone India forecast; its income-group estimates should therefore not be read as precise projections for India.
Four Transformations Are Operating Together, Not Separately
The paper’s central analytical contribution is to examine four structural changes within one macroeconomic framework:
Demographic transition can reduce labour-force and productivity growth in ageing economies. Younger countries may benefit, but only if employment, skills and capital investment keep pace with workforce growth.
Climate change can destroy productive assets, disrupt agriculture and supply chains, raise adaptation expenditure and generate repeated food and energy price shocks.
Geoeconomic fragmentation can weaken trade, foreign investment, technology transfer and international risk-sharing while increasing supply-chain and financial volatility.
Artificial intelligence can raise productivity, but the scale and timing of these gains depend on digital readiness, investment, workforce adjustment and firms’ ability to reorganise production.
The report estimates each effect separately but warns that their combined impact may exceed the sum of the individual effects. Fragmentation, for example, can obstruct migration from younger to ageing economies and slow the international diffusion of AI technologies.
Fiscal Space Is Being Squeezed from Both Directions
Governments will face higher spending needs for climate adaptation, infrastructure, health, pensions, human capital and economic security. At the same time, weaker growth and potentially higher risk premia can reduce the amount of debt they can sustain.
For emerging markets and low-income countries, the paper sees some scope to preserve fiscal space through additional revenue mobilisation. Its simulations suggest that closing up to half of the estimated tax gap in emerging markets could generate median revenue gains of around 2.6% of GDP annually.
That finding is conditional rather than automatic. Administrative capacity, political acceptance and the effect of taxation on investment will determine whether theoretical tax capacity can become durable revenue. The paper also cautions that AI and the green transition may alter the tax base: automation could weaken labour-income taxation, while decarbonisation may reduce fuel- and carbon-related revenues.
Inflation Targeting Needs Refinement, Not Wholesale Replacement
Inflation-targeting frameworks have remained broadly resilient, but more frequent supply shocks create a sharper choice between containing inflation and protecting output.
A central bank can sometimes tolerate—or “look through”—a temporary supply shock when inflation expectations remain anchored. That approach becomes riskier when:
inflation is already elevated;
shocks are large, frequent or persistent;
businesses can readily pass higher costs into prices;
wages respond strongly to past inflation; or
the central bank’s credibility is weak.
The paper’s simulations show that a second supply shock arriving before inflation has returned to target can require a much larger interest-rate response, even when the second shock is no bigger than the first.
Rather than redesigning inflation targets, the authors favour risk scenarios alongside baseline forecasts, clearer explanations of the central bank’s likely response under different conditions, and strong safeguards against fiscal pressure influencing monetary decisions.
What Does “Looking Through” a Supply Shock Mean?
A central bank “looks through” a supply shock when it does not fully respond to the immediate rise in inflation — such as that caused by a temporary food, fuel or supply-chain disruption — because raising interest rates cannot directly restore the affected supply. This approach is safer when the shock is short-lived and does not spread into wages, expectations and wider prices.
External Buffers May Need to Cover More Frequent Stress
Geoeconomic fragmentation could make trade flows, capital movements and exchange rates more volatile. It may also deepen financial-market frictions by reducing foreign participation, weakening market liquidity or increasing foreign-currency mismatches.
In a simulation covering 40 emerging markets, fewer than half initially had reserve shortfalls under the IMF’s adequacy benchmark. When the assumed probability of a sudden stop doubled from 10% to 20%, the share with shortfalls rose to two-thirds.
The paper does not argue that every country should mechanically accumulate more reserves. Holding reserves has costs, and using them during one episode reduces protection against the next. It instead recommends scenario-based reserve assessment, deeper domestic financial markets and clearer conditions for combining exchange-rate flexibility with foreign-exchange and macroprudential measures.
Policy Relevance
For India, the paper connects three policy debates that are often considered separately.
Growth and fiscal strategy: India’s demographic profile can remain supportive of growth, but the benefit depends on productive employment, human capital and infrastructure. Climate adaptation, industrial policy, social protection and technology investment will simultaneously compete for fiscal resources. Budget choices therefore need to be assessed not only individually but against their cumulative medium-term cost.
Inflation and government finances: Food, energy and climate-related shocks can place the RBI’s inflation objective and the government’s fiscal response under pressure at the same time. Broad fiscal support may soften the immediate impact on households but can also sustain demand and require tighter monetary policy. Targeted, temporary supportis more compatible with preserving both fiscal space and monetary credibility.
External resilience: India’s foreign-exchange reserves, exchange-rate flexibility, domestic capital markets and prudential regulation form a combined defence against volatile global capital and trade flows. Reserve adequacy should consequently be tested against multiple and repeated shocks, rather than judged only against historical volatility.
The report’s larger implication is that resilience cannot be assigned to one institution. Fiscal policy, monetary policy and external-sector management must remain institutionally distinct but strategically coherent, particularly when several structural shocks arrive together.
Follow the Full Paper Here: Resilience amid Structural Transformations: Are Macro Policy Frameworks Fit for Purpose?