Raising interest rates was the wrong medicine

Abstract

PurposeIn this paper, the authors examine the causes of 2021–2023 inflation and evaluate whether raising interest rates is the right solution.Design/methodology/approachThe authors evaluate both the macroeconomic (too much demand) and microeconomic (monopoly pricing and supply chains) explanations for the causes of inflation.FindingsThe authors argue that the spike in inflation is due to disrupted supply chains and corporations taking advantage of the situation to raise their prices. The aggregate demand stimulus from fiscal policy had all but played out by the time inflation arose, making it an unlikely cause of said inflation.Originality/valueThe authors' paper demonstrates that raising interest rates is the wrong solution to tackling the problem of inflation, especially since it's coming from the supply side.

Editorial: Debts, deficits, and inflation: prescriptions for the future

“…They believe that a combination of fiscal and monetary policy tightening in the face of continuing significant supply-side problems make a hard landing more probable. Nersisyan and Wray (2024) propose that the following measures would constitute a better way for tackling inflation: more investment in low-income housing (to curtail rent hikes), higher investment in alternative energy (to reduce dependence on volatile and climate-unfriendly fossil fuels) and greater efforts to combat price-gouging activities by large corporations.…”

“…In light of the US experiences with monetary and fiscal policies, Nersisyan and Wray (2024) urge scholars to reconsider how we view inflation. The pandemic demonstrated that the key challenge in the economy is the availability (or lack thereof) of real resources.…”

“…In their article, Nersisyan and Wray (2024) challenge the mainstream consensus that slow economic growth is a supply-side problem while inflation is a demand-side problem. They investigate the causes of 2021-2023 inflation in the USA and assess whether raising interest rates is the correct solution.…”

“…The corporations took advantage of the period of disruption and increased their prices. Nersisyan and Wray (2024) suggest that since the aggregate demand stimulus offered by fiscal action by the federal government had already run its course by the time inflation surged, it would be implausible to attribute increased inflation to the fiscal stimulus (see also Nersisyan and Wray, 2022). Hence, they argue that raising interest rates has been the wrong medicine.…”

“…Two articles in the symposium – by Georgiou (2024) and Douglas and Raudla (2024) – focus on fiscal issues and discuss the challenges of deficit and debt in the European Union and US states. The two remaining articles examine the topic of inflation and its implications for fiscal policy: Nersisyan and Wray (2024) focus on the federal government level and Martell (2024) on the local government level in the USA.…”