Economics, Econometrics and Finance
8 years ago

Central banks' response to inflation crucial for global economic stability.

SSRN Electronic Journal
Inflation and the global economy
Timothy Besley

Paper Summary

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Countries experienced high inflation in the 1970s and 1980s, but it became stable later on. The change was due to central banks adjusting interest rates. High inflation was linked to negative real interest rates, showing a relaxed monetary policy. Low inflation now is because of positive real interest rates. Trying to use monetary policy to fix negative productivity shocks didn't work before. Monetary policy can't stop necessary changes in the economy but can help smooth out the effects of credit shocks. The goal is to keep inflation expectations around 2% to maintain stability for businesses and households to plan for the future.