Rob Arnott, chairman at Research Affiliates, shares his views on central banks’ ability to keep inflation under control, and highlights the work of Knut Wicksell, a Swedish economist who 100 years ago pioneered work on “natural interest rate.”

Catch Rob’s full interview where he shares why indexing changed everything, why value is back and the fact that not all inflation is created equal:

#inflation #centralbanks

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Central banks have a crucial role to play in managing inflation in an economy. Inflation, the rate at which the general level of prices for goods and services is rising, can have a significant impact on a country’s economy, affecting everything from consumer purchasing power to investment decisions.

Central banks have a number of tools at their disposal to rein in inflation. One of the most commonly used tools is monetary policy, which involves controlling the supply of money in the economy. Central banks can do this by adjusting interest rates, buying or selling government securities, or changing reserve requirements for banks.

By raising interest rates, central banks can make borrowing more expensive, which in turn can help to slow down spending and investment in the economy. This can help to cool down inflationary pressures. On the other hand, central banks can also lower interest rates to stimulate economic activity and combat deflation, or falling prices.

Central banks also keep a close eye on the money supply in the economy. If they believe that the money supply is growing too quickly and fueling inflation, they can take steps to reduce it. This could involve selling government securities on the open market or increasing reserve requirements for banks.

In addition to these traditional tools, central banks can also communicate with the public about their inflation-fighting efforts. By setting clear targets for inflation and explaining their rationale for policy decisions, central banks can help to shape public expectations and influence behavior.

However, reining in inflation is not always an easy task. Central banks must carefully balance the need to control inflation with the goal of maintaining economic growth and employment. Tightening monetary policy too quickly or aggressively can lead to a recession, while being too slow to act can allow inflation to spiral out of control.

Overall, central banks play a vital role in managing inflation in an economy. Through a combination of monetary policy tools and clear communication with the public, central banks can help to keep inflation in check and ensure a stable and healthy economy.