A new study argues that central banks cannot tackle inflation without more rational fiscal policy

A new study says that central banks will fail to do so Inflation rate It may drive price growth higher unless governments implement more rational budgetary policies.

The study was presented to policymakers assembled on Saturday in Federal Reserve in Kansas City Jackson Hole Economic Symposium.

Jerome Powell, Chairman of the US Federal Reserve, leaves the reception dinner at the Jackson Hole Economic Symposium in Moran, Wyoming, US, on Thursday, August 25, 2022. (David Paul Morris/Bloomberg via Getty Images/Getty Images)

Francesco Bianchi of Johns Hopkins University and Leonardo Melusi of the Federal Reserve Bank of Chicago have argued that if monetary tightening is not supported by appropriate fiscal adjustments, “a worsening of fiscal imbalances (will) increase inflationary pressure.”

“As a result, a vicious cycle of rising nominal interest rates, rising inflation, economic stagnation and increasing debt will arise,” the paper said. “In this pathological situation, monetary tightening will in fact lead to increased inflation and will lead to harmful stagflation in public finances.”

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The study concluded that US fiscal policy was one of the factors behind the recent rise in US inflation and that even if central banks raised interest rates earlier, they likely wouldn’t make much difference.

“A more hawkish Fed policy would have reduced inflation by only one percentage point at the expense of cutting production by about 3.4 percentage points,” the report’s authors said. “That’s a very big sacrifice.”

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The central bank, as it does now, raises the benchmark short-term interest rate when it wants to reduce inflation, and lowers it when it wants to speed up employment. Such moves, in turn, affect borrowing costs throughout the economy – to Mortgages, auto loans and business loansamong other things.

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On Friday, in his address to the Jackson Hole symposium, Chairman Jerome Powell stressed that the Fed plans to raise rates further and expects to keep the benchmark interest rate high until the worst bout of inflation in four decades largely abates — even if it causes Job loss and financial suffering for families and companies.

The Associated Press contributed to this report.

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