How should central banks reduce inflation? - conceptual issues

Quarterly Bulletin 1996 Q4
Published on 01 December 1996

By Mervyn King, Executive Director and Chief Economist of the Bank of England.

Mervyn King, Executive Director and Chief Economist of the Bank, discusses(1) how quickly a central bank should reduce inflation to its desired level following an inflationary episode. He argues that a central bank is unlikely to wish to move immediately to price stability, since there are costs to disinflation and these costs increase more than proportionally with the rate of disinflation. These costs, which arise because economic agents have to learn about the central bank’s commitment to price stability, also mean that a central bank may wish to react to shocks to output as well as to inflation. But Mervyn King stresses that any such response should be cautious in the period in which the private sector is still learning about the central bank’s commitment to price stability.

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