How much is inflation affected by monetary policy?

Economic Commentaries, News Since 2021, inflation has risen and monetary policy has been tightened in many countries, as a result of central banks having both increased their policy rates and reduced their holdings of financial assets. These are significant changes in monetary policy that are expected to last for several years, and longer-term interest rates have therefore also risen.

In an Economic Commentary, three economists linked to the Riksbank’s Research Division discuss the effects of monetary policy on inflation using a number of macroeconomic models. According to their analysis, changes in monetary policy that are expected to be temporary have only small effects on the economy and inflation. However, changes that are expected to last for a longer period of time, such as those we are seeing now, can have significantly larger effects.

The calculations reflect part of the Riksbank's overall assessment of the effects of monetary policy. The Riksbank's forecasts include a number of other factors that, in different situations, influence the assessment of the impact of monetary policy.

Authors: Stefan Laséen, Jesper Lindé and Ulf Söderström.

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Updated 20/12/2022