Discussion Paper Series 2022-E-12

Inflation Surges and Monetary Policy

Carl E. Walsh

Similarities between the 1960s and 1970s raise concerns that central banks are repeating mistakes that led to the Great Inflation. Two explanations for this earlier period of inflation, that it was due to shocks and special factors or that it was the result of political pressures on monetary policy, seem particularly relevant today. Major central banks such as the Federal Reserve and the ECB have been slow to react to the surge in inflation due to COVID-19 and the war in Ukraine. I investigate the consequences of policy delay and the impact of a more aggressive reaction, conditional on policy being delayed. In assessing the persistence of inflation shocks and in dealing with uncertainty about inflation dynamics, policymakers seem to be ignoring lessons from the literature on monetary policy in the face of model uncertainty.

Keywords: Inflation; Monetary policy; COVID-19


Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

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