Why monetary policy should crack down harder during high inflation

Peter Karadi, Anton Nakov, Galo Nuño, Ernesto Pasten and Dominik Thaler

Research Bulletin, 2025, vol. 130

Abstract: The recent surge in inflation has led to a significant increase in the frequency of price changes, making prices more flexible. Conventional models assume a constant price change frequency, but in state-dependent models the frequency varies with economic conditions. Price flexibility has an impact on the effectiveness of monetary policy. In high inflation periods, frequent price changes make monetary policy more effective in reducing inflation with less impact on economic activity. Therefore, monetary policy should be more aggressive during such periods to stabilise prices efficiently. This approach allows central banks to achieve a “soft landing” with less impact on activity. Overall, central banks should adjust their strategies based on the inflation environment to optimise economic outcomes. JEL Classification: E31, E32

Keywords: cost-push shocks; high inflation; Optimal monetary policy; Ss pricing (search for similar items in EconPapers)
Date: 2025-04
Note: 1871516
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