Ales Marsal

(National Bank of Slovakia)

will give a presentation on

Prescriptions for Monetary Policy when Inflation Is High

Abstract: 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 from de-anchoring is to follow the Taylor principle, according to which the nominal interest rate should rise more than proportionally with inflation. We show that once inflation is high, the distribution of prices across products widens and inflation uncertainty rises, the Taylor principle is no longer sufficient for inflation stability. Anchoring of inflation expectations then requires a considerably more aggressive monetary stance, focusing strictly on targeting inflation and abstaining from virtually any aim to stabilize the real side of the economy.