Exploring the role of monetary policy in reducing inflation, the impact of Central Bank policies on stabilizing inflation expectations, how central banks influence inflation through wage and price adjustments, the use of signals by central banks to shape aggregate demand, and the impact of inflation regimes on sector shocks and current measures.
Central bank actions have been effective in lowering inflation rates globally.
Central banks play a crucial role in preventing sectoral shocks from perpetuating and leading to persistent high inflation.
Deep dives
The Role of Central Bank Policies in Bringing Down Inflation
The podcast discusses how central bank policies have played a crucial role in bringing down inflation from its recent peak. Central banks have raised interest rates to stabilize inflation, which had risen to levels not seen in decades. The increase in interest rates takes time to impact inflation, and the effectiveness of central bank actions in bringing down inflation is critical in calibrating future monetary policy. The podcast highlights that central bank actions have been effective in lowering inflation, as evidenced by the decrease in global inflation rates. The tightening of monetary policy and the commitment of central banks to stabilize inflation have helped anchor inflation expectations and prevent a persistent increase in prices.
The Impact of Sectoral Shocks on Inflation
The podcast recognizes that a significant part of the inflation increase in 2021 and 2022 was due to sectoral shocks, such as the rise in energy prices. While these shocks initially pushed up inflation, their effects fade over time. However, the podcast emphasizes that central bank actions are crucial in preventing these shocks from perpetuating and leading to persistent high inflation. By increasing interest rates and signaling their commitment to lowering inflation, central banks influence inflation expectations, prompting wage setters and price setters to moderate their demands and prevent inflationary spirals.
The Importance of Central Bank Credibility and Inflation Expectations
The podcast underscores the importance of maintaining central bank credibility and inflation expectations. Central banks establish credibility by delivering on their inflation targets, gaining the trust of economic agents. In low inflation regimes, sectoral shocks have limited and short-lived effects on inflation. This return to the mean properties of inflation is a testament to the credibility of central banks in maintaining low inflation. While inflation has decreased significantly in recent times, it is not yet at the target level. Preserving central bank credibility and the trust in low inflation remains crucial for achieving and sustaining the 2% inflation target.
What role have central banks played in bringing down inflation? 2023 has seen central banks across the globe respond forcefully to the recent rise in inflation. But given that much of this increase was due to sectoral shocks, what can monetary policy do to counter it? Benoit Mojon explains the findings of a new BIS Bulletin on monetary policy and disinflation, co-authored with other BIS economists.
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