Since 2021, inflation has risen and monetary policy has been tightened in many countries. Central banks have raised their policy rates by several percentage points and started to reduce 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. A key question for central banks is how much tightening is needed to stabilise inflation? Or in other words: How large are the effects of monetary policy on inflation?

In this commentary, we discuss the effects of monetary policy on inflation using a number of macroeconomic models. Many empirical studies and model estimates may give the impression that monetary policy has relatively small effects on inflation. Our message is that changes in monetary policy that are expected to be temporary have only small effects on the economy and inflation. However, today's more persistent changes may have significantly larger effects. Our 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^[1] Stefan Laséen is a Senior Advisor at the Research Division, Jesper Lindé is an Advisor at the International Monetary Fund (IMF), and Ulf Söderström is Head of the Research Division. We thank Mikael Apel, Charlotta Edler, Thomas Eisensee, Mattias Erlandsson, Jens Iversen, Ingvar Strid and Anders Vredin, as well as seminar participants at the Riksbank for valuable comments and discussions. In particular, we would like to thank Thomas Eisensee at the National Institute of Economic Research and Ingvar Strid at the Riksbank's Monetary Policy Department for their help in deriving the effects of an interest rate increase in the macroeconomic models Selma and Maja. The views expressed are those of the authors and do not necessarily represent the views of the Riksbank, the IMF, its Executive Board, or IMF management.