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Artus – Why monetary policy cannot control inflation

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CHRONIC. In the 1980s, central banks mainly relied on monetary policy to regulate inflation. It was a mistake.

By Patrick Artus*

France, 2022-01-07. Savings illustration. Photograph by Thibaut Durand / Hans Lucas. France, 2022-01-07. Savings illustration. Photography by Thibaut Durand / Hans Lucas. (Photo by Thibaut Durand / Hans Lucas / Hans Lucas via AFP) © THIBAUT DURAND / Hans Lucas / Hans Lucas via AFP

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PLet’s take the example of inflation and monetary policy in the euro zone. Inflation and core inflation (excluding energy and food) in the euro zone were very low from 2012 to 2020, below 1%. But since the start of 2021, they have been very high, with inflation peaking in October 2022 at 10.6% year on year, and underlying inflation continuously rising, reaching 7.4% in March 2023.

Since the beginning of the 1980s, the vast majority of central banks have rallied around the control of inflation, taking a 2% increase as their objective, and have decided that monetary policy will henceforth be devoted to respecting this objective. This decision by the central banks brought about a significant change in the conduct of global policy…

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