Inflation Heresies

CAMBRIDGE – The specter of inflation is once again stalking the world, after a long period of dormancy during which policymakers were more likely to be preoccupied by price deflation. Now, old debates have resurfaced on how best to restore price stability.

Should policymakers step on the monetary and fiscal brakes, by reducing spending and raising interest rates – the orthodox approach to fighting inflation? Should they instead move in the opposite direction by lowering interest rates, a route followed by Turkey’s central bank under the direction of President Recep Tayyip Erdoğan? Or should policymakers perhaps try to intervene more directly, through price controls or by clamping down on large firms with price-setting power, as some economists and historians in the United States have argued.

If you have a knee-jerk reaction to these policies – immediately endorsing one remedy while rejecting others out of hand – think again. Economics is not a science with fixed rules. Varying conditions call for different policies. The only valid answer to policy questions in economics is: “It depends.”

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