More than a year after the first actions, with a pandemic still to be overcome, but with the global economy heading for recovery, the eyes of the world turn to central banks, but now seeking guarantees against a risk that until recently went unnoticed and that in one way or another is a consequence of the first measures: inflation.
It is true that, given the concern about the recent inflationary risks, different officials of the main central banks have dismissed them as temporary, and in fact the forecasts of the variable in most developed and emerging economies suggest that it would normalize Over the next year, however, the monetary authorities will give special follow-up to the development of inflation.
In this context, an interesting discussion arises about the tools available to central bankers to combat inflation.
With many nuances, specific circumstances, and with technical support behind it, monetary policy basically works like this: when the economy is below full employment, it opts to lower interest rates, making financing and credit more accessible, achieving thus a stimulus.
On the other hand, while the economy is already in full employment or close to that level, if the stimulus continues, there is a risk of overheating it, since people with more money demand more, and as a consequence prices are pressured and interest rates must go up. I insist: the above is a simplification of the operation of monetary policy and the economy.
The criterion that central bankers follow to raise or lower the interest rate is known as the monetary policy rule, which is nothing more than a mathematical calculation that seeks to find the optimal interest rate for each economy and at each moment.
The policy rule suggests what should be the direction of changes in the benchmark (or in any case, keep it unchanged), although by itself it is insufficient to make a monetary decision, since it does not provide information on the magnitude of the movements.
Furthermore, its estimation is rigid and punctual, contrary to the real behavior of economic variables that always have a certain degree of change and even many of them are practically inestimable, which significantly increases the probability of breaching the policy rule.