How do central banks control inflation? A guide for the perplexed

Laura Castillo-Martinez () and Ricardo Reis
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Laura Castillo-Martinez: Duke University

No 2433, Discussion Papers from Centre for Macroeconomics (CFM)

Abstract: Central banks have a primary goal of price stability. They pursue it using tools that include the interest they pay on reserves, the size and the composition of their balance sheet, and the dividends they distribute. We describe the economic theories that justify the central bank’s ability to control inflation and discuss their relative effectiveness, in light of both theory and the historical record. We present alternative approaches as consistent with each other, as opposed to conflicting ideological camps. While interest-rate setting is often superior, having both a monetarist pillar and fiscal support is essential, and at times pegging the exchange rate or monetizing the debt is inevitable.

Keywords: monetary policy; policy rules; determinacy; effectiveness (search for similar items in EconPapers)
JEL-codes: E31 E52 E61 (search for similar items in EconPapers)
Pages: 70 pages
Date: 2024-07
New Economics Papers: this item is included in nep-cba and nep-mon
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Working Paper: How do central banks control inflation? A guide for the perplexed (2024)
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