How do central banks control inflation? A guide for the perplexed

Central banks are tasked with managing the money supply, which in turn should affect their currency’s value and inflation. To expand the money supply, most advanced countries buy their own bonds and give the seller currency, and to reduce the money supply, they sell their bonds and pull currency out of circulation. Interest rates can also be adjust

By raising and lowering supplies of money and credit, central banks are able to raise and lower the demand and production of financial assets, goods, and services.

The sum total of the contribution of both these schools of thought is the consensus taught in undergraduate macroeconomics courses across the world: that the central bank should be in the business of expanding the money supply at a controlled pace, to encourage people to spend more and thus keep the unemployment level sufficiently low. Should a cen

The first reason is that they’re volatile. The second is that they’re influenced by factors beyond what domestic policymakers can control. For instance, both food and fuel prices are governed by global demand and supply. The RBI increasing interest rates can’t bring down the price of Brent crude oil. Therefore, central banks focus more on core infl

Saint Milton Friedman taught us that inflation is always and everywhere a monetary phenomenon. A central bank, by printing too much money, can bring about inflation and destroy a currency, all things being equal. But that is the tricky part of that equation, because not all things are equal.