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Monetary policy, relative prices and inflation control: flexibility born out of success

Author

Listed:
  • Claudio Borio
  • Piti Disyatat
  • Dora Xia
  • Egon Zakrajšek

Abstract

The achievement of low and stable inflation on the back of credible monetary policy frameworks has coincided with a sharp and major drop in the co-movement of prices across finely disaggregated sectors of the economy. In other words, sector-specific price developments have become much more prominent in driving fluctuations in aggregate price indices. In addition, changes in the stance of monetary policy in this environment affect a rather narrow set of prices, limiting the policy's ability to steer inflation within tight ranges as well as the desirability of doing so. All told, this highlights the importance of flexibility in the pursuit of inflation targets within a credible policy regime.

Suggested Citation

  • Claudio Borio & Piti Disyatat & Dora Xia & Egon Zakrajšek, 2021. "Monetary policy, relative prices and inflation control: flexibility born out of success," BIS Quarterly Review, Bank for International Settlements, September.
    • Handle: RePEc:bis:bisqtr:2109b
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    References listed on IDEAS

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    Cited by:

    1. Sarah Arndt & Zeno Enders, 2023. "The Transmission of Supply Shocks in Different Inflation Regimes," CESifo Working Paper Series 10839, CESifo.
    2. Claudio Borio & Marco Jacopo Lombardi & James Yetman & Egon Zakrajsek, 2023. "The two-regime view of inflation," BIS Papers, Bank for International Settlements, number 133.
    3. Francisco J. Ruge-Murcia & Alexander L. Wolman, 2022. "Relative Price Shocks and Inflation," Working Paper 22-07, Federal Reserve Bank of Richmond.
    4. Claudio Borio, 2021. "Back to the Future: Intellectual Challenges for Monetary Policy," Economic Papers, The Economic Society of Australia, vol. 40(4), pages 273-287, December.
    5. Nuwat Nookhwun & Pym Manopimoke, 2023. "Disaggregated Inflation Dynamics in Thailand: Which Shocks Matter?," PIER Discussion Papers 211, Puey Ungphakorn Institute for Economic Research.
    6. Claudio Borio, 2021. "Navigating by r*: safe or hazardous?," BIS Working Papers 982, Bank for International Settlements.

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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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