High inflation in many countries will not be defeated by firm monetary policies alone, nor will it be tackled without them. Even if monetary policies are tightened massively, inflation will not fall relatively quickly and sustainably to the desired levels until fiscal expectations are stabilized. The latter condition will not be easy to meet, especially in the euro area. And as long as this condition is not met, the problem of relatively high inflation will remain, whatever the central banks do. There are credible studies on the line of fiscal price theory that show that the Great Inflation was not defeated in the US until after the central bank strongly strengthened monetary policy, and subsequently fiscal policy stabilized fiscal expectations. However, monetary policy must act intelligently, no matter what fiscal policies do from now on. Because my interest here is focused on monetary policy, I will conveniently, but probably unrealistically assume, that the world’s fiscal policies will not be a problem and will stabilize fiscal expectations.
But what about monetary policy? Will it do its part to stabilize inflation? Could smaller central banks strongly tighten monetary policies and reduce inflation in their countries if the world’s major central banks did not tighten theirs decisively?
» Citește continuarea pe pagina autorului
