Controllability of inflation: myths and facts

Abstract The high inflation occurring in the aftermath of the Corona pandemic rekindled an interest in the previous high inflation period of the 70s. Many feared that inflation was finally back again and hoped that central banks would be able to bring inflation down to previously low levels. To address this issue, the paper uses theoretical results on inflation control in Johansen, S. and K. Juselius (2024) to examine the conditions under which a monetary control rule would bring inflation down. Based on two different monetary policy regimes in the USA, one covering the Burns/Miller chairmanship in 1970–1979 and the other the Greenspan chairmanship in 1987-2006, the paper examines inflation control in the two periods. The empirical results provide little support for the widely held belief that the Federal Reserve Bank would have been able to control inflation by raising the federal funds rate. A discussion of why this was the case concludes the paper.