Inflation has obviously become a big issue over the last couple of years again, and I've read people complaining that the inflation comes from increased prices of energy imports, (namely oil and gas), and that interest rate policy from central banks is (in this person's view) bad, because there may be little to no inflation (or even deflation!) in locally-made goods, but the interest rate doesn't discriminate (unsure how valid this is, but I digress).

It got me wondering: if interest rate policy as a tool were to disappear tomorrow, how could we/would we manage inflation? What ideas have been proposed as other ways of managing inflation, and how do they stack up? Are there any policies which (even if theoretical right now) would be better for managing inflation than the tools we have right now? Why haven't they been tried?

  • $\begingroup$ If interest rate policy disappeared as a tool, that would mean the Federal Reserve would effectively stop existing, right? No more interest on excess reserves, and no emergency loans because it would be impossible to set an interest rate for them. Then we would go back to the pre-central-banking model of interest rates. $\endgroup$
    – user253751
    Jun 20, 2023 at 12:09
  • $\begingroup$ Price controls, goods rationing, inadequate amounts of money and severe restrictions on borrowing/lending have each been tried - usually with predictable negative results (including inefficient ways of avoiding the resulting distortions) $\endgroup$
    – Henry
    Jun 20, 2023 at 13:04
  • $\begingroup$ @user253751 I guess they could stop existing, but they don't necessarily have to. I was thinking of if they, or another government body were fighting inflation using other means, not really a return to the days of wildcat banks (though I guess that is a valid answer 😄) $\endgroup$
    – tvqt
    Jun 20, 2023 at 21:11
  • $\begingroup$ @tvqt If they do deposits that pay interest they have to decide an interest rate, which is interest rate policy, but if they don't pay interest they can avoid that. If they do loans they always need an interest rate, which would be interest rate policy, so they couldn't do loans. What else do they do that's not interest rate policy? OMOs? But they do OMOs to influence the interest rate, so they probably wouldn't. $\endgroup$
    – user253751
    Jun 21, 2023 at 13:51
  • $\begingroup$ @user253751 the way the central bank sets interest rate policy is through " setting the interest rate on overnight loans in the money market (‘the cash rate’)." see (rba.gov.au/monetary-policy) I'm simply saying if that was no longer an option for them, (i.e they no longer provided overnight loans), nor any other instruments for controlling interest rates $\endgroup$
    – tvqt
    Jun 21, 2023 at 22:04


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