The contribution of monetary policy to disinflation

Key takeaways

• Much of the inflation increase in 2021 and 2022 was due to sectoral shocks on which monetary policy has close to no traction. What monetary policy can do, or fail to do, is to ensure that the effects of these shocks dissipate swiftly.
• We argue that, absent the somewhat delayed but vigorous increases in policy interest rates since 2022, inflation would have subsided more slowly in 2023.
• Central banks' most important contribution to inflation is to demonstrate commitment to achieving their targets and ensuring that low inflation remains the norm for price- and wage-setting decisions.