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It's not so much that central banks are reactive as that central banks can't set interest rates and the inflation rate simultaneously. In other words, central
by lottin 5y ago
It's not so much that central banks are reactive as that central banks can't set interest rates and the inflation rate simultaneously. In other words, central banks can set nominal interest rates, but real rates (i.e. nominal rates adjusted for inflation) are ultimately set by the market.
- imtringued 5y agoThis is just an indirect form of the impossible trinity. https://en.wikipedia.org/wiki/Impossible_trinity https://en.wikipedia.org/wiki/Impossible_trinity Targeting low inflation is price stability and assuming every single central bank targets the same inflation target then you implicitly target a specific exchange rate (with some fluctuations). If you set the interest rate arbitrarily people flee the currency and break the implicit peg which can manifest itself as inflation.