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

Laura Castillo-Martinez and Ricardo Reis

No 19334, CEPR Discussion Papers from Centre for Economic Policy Research

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.

JEL-codes: E31 E52 E61 (search for similar items in EconPapers)
Date: 2024-08
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Related works:
Journal Article: How Do Central Banks Control Inflation? A Guide for the Perplexed (2026)
Working Paper: How do central banks control inflation? A guide for the perplexed (2026)
Working Paper: How do central banks control inflation? A guide for the perplexed (2024)
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