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

Castillo Martinez, Laura and Reis, Ricardo ORCID: 0000-0003-4844-9483 (2025) How do central banks control inflation? A guide for the perplexed. Journal of Economic Literature. ISSN 0022-0515 (In Press)

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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 to the fiscal authority. We describe the economic theories that justify the central bank’s ability to control inflation and discuss their relative effectiveness in light of the historical record. We present alternative approaches as consistent with each other, as opposed to conflicting ideological camps. While interest-rate setting may often be superior, having both a monetarist pillar and fiscal support is essential, and at times pegging the exchange rate or monetizing the debt is inevitable.

Item Type:	Article
Additional Information:	© 2025 The Author(s).
Divisions:	Economics
Subjects:	H Social Sciences > HG Finance H Social Sciences > HB Economic Theory
JEL classification:	E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level; Inflation; Deflation E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy (Targets, Instruments, and Effects) E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy Formation, Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General Outlook > E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination
Date Deposited:	16 Jun 2025 09:00
Last Modified:	16 Jun 2025 09:06
URI:	http://eprints.lse.ac.uk/id/eprint/128408

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