When working on inflation, central banks, interest rates etc., I summarized the info in various sources as follows:

When there is not enough money in the economy system, the money in circulation becomes scarce.
This shortage of money increases the value of money.
However, central banks generally do not want money to be over-valued;
for a central bank, negative inflation is almost as dangerous as excessive inflation.
Therefore, the central bank controls interest rates in both ways to keep inflation close to its target rate.

What could be the logical interpretation of the phrase "in both ways" in the above paragraph?

a) Does it refer "(target inflation rate - epsilon, target inflation rate + epsilon)" (sor some plausible epsilon)?
b) Does it refer "(interest rate - epsilon, interest rate + epsilon)" (sor some plausible epsilon)?
c) Does it refer "under-valued money" and "over-valued money"?

Or any other interpratation that explains the phrase "in both ways" better than the above three meaning...

One of the sources reads as follows:

In the 21st century, most economists favor a low and steady rate of inflation. In most countries, central banks or other monetary authorities are tasked with keeping their interbank lending rates at low stable levels, and the target inflation rate of about 2% to 3%. Central banks target a low inflation rate because they believe that high inflation is economically costly because it would create uncertainty about differences in relative prices and about the inflation rate itself. A low positive inflation rate is targeted rather than a zero or negative one because the latter could cause or worsen recessions; low (as opposed to zero or negative) inflation reduces the severity of economic recessions by enabling the labor market to adjust more quickly in a downturn, and reduces the risk that a liquidity trap prevents monetary policy from stabilizing the economy.

I could not find exact source from where I deduced that this "in both ways" phrase.

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    $\begingroup$ Is this a quote from a document? It would be best to provide a reference, and to make sure you have the exact wording. Right now, the wording is a bit unusual. I would eliminate your guesses at the meaning, and just ask for an explanation of the meaning. $\endgroup$ – Brian Romanchuk Apr 21 '20 at 16:34

The sentence:

Therefore, the central bank controls interest rates in both ways to keep inflation close to its target rate.

does not make sense to me, and I am having a difficult time parsing the three suggested alternatives. (“Money over/under-valued” does not appear to make sense, since the value of money is always 1.)

In most cases, a central bank has a symmetric inflation target (e.g., the Bank of Canada has had a 2% inflation target). It will attempt to raise the inflation rate if it is below 2%, and reduce it if inflation is above 2%. Thus it is concerned with deviations “both ways.”

The inflation target need not be symmetric. E.g., one interpretation of the ECB mandate is to keep inflation below 2%. In which case, policy direction does not work “both ways”, since inflation does not need to be pushed up.

It will raise and lower interest rates (as well as other policy actions) in an attempt to steer inflation. That is, interest rates move “both ways” to hit its target. However, it is unclear why that would be specified.

  • $\begingroup$ Nice explanation, especially via Bank of Canada and ECB. Many thanks. As you specified in ("Money over/under-valued” does not appear to make sense, since the value of money is always 1"), I thoght that part again. Hence, instead of [However, central banks generally do not want MONEY to be over-valued;], I should have noted [However, central banks generally do not want CURRENCY to be over-valued;] from reading related texts. $\endgroup$ – Erdogan CEVHER Apr 22 '20 at 7:15
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    $\begingroup$ “Currency” has a couple meanings, and one of them (“currency in circulation”) effectively has the same meaning as “money”. What people are normally referring to is the value of a currency in foreign exchange markets (that is, value versus foreign currencies). It is probably better to add some extra words to make that clear. $\endgroup$ – Brian Romanchuk Apr 22 '20 at 12:50

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