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Prescriptions for Monetary Policy when Inflation Is High (Aleš Maršál)

Event start date: 22.02.2023 16:00

Event end date: 22.02.2023 17:00

Open Research Seminar

On 22 February 2023, the National Bank of Ukraine hosted a seminar, Aleš Maršál (National Bank of Slovakia) gived the presentation on the topic Prescriptions for Monetary Policy when Inflation Is High.

Inflation in most western advanced economies has been rising at a fast pace since the middle of 2021. The necessary condition for central banks to maintain price stability is to prevent temporary shocks to inflation from feeding into the mechanisms of wage and price formation (Bernanke 2007, Draghi 2014). The monetary theory prescription to avoid these self-fulfilling inflation expectations and prevent long-term inflation expectations to de-anchor is to follow Taylor principle, according to which the nominal interest rate should rise more than proportionally with inflation. We show that once the inflation is high, the distribution of prices across products widens and inflation uncertainty rises, the Taylor principle is no longer sufficient for inflation stability. The anchoring of inflation expectations instead calls for strict inflation targeting and abstaining from virtually any aim to stabilize the real side of the economy.

Materials from the seminar are available via links below.