Discussion Paper Details

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Title: Central Banks and Inflation: Where Do We Stand and How Did We Get Here?

Author(s): Karl Whelan

Publication Date: September 2021

Keyword(s): central banks, inflation, Milton Friedman and Phillips curve

Programme Area(s): Monetary Economics and Fluctuations

Abstract: The inability of central banks to attain their target inflation rates in recent years has raised questions about the extent to which central banks can control the inflation process. This paper discusses the evolution of thought and evidence since the 1960s on the determinants of inflation and the role that should be played by central banks. The paper highlights the roles played by two streams of thought associated with Milton Friedman: Monetarist theories predicting a key role for monetary aggregates in determining inflation and the rise in popularity of the expectations-augmented Phillips curve. We discuss influence of the latter in determining the modern consensus on central bank institutions and the relative roles for fiscal and monetary policies. We conclude with a discussion of macroeconomic developments of the past decade and current policy options to stimulate the economy and restore inflation to its target levels, including the merits of "helicopter money".

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Bibliographic Reference

Whelan, K. 2021. 'Central Banks and Inflation: Where Do We Stand and How Did We Get Here?'. London, Centre for Economic Policy Research.