Safeguarding the value of the currency is not always an easy task. The correct answer to this challenge forms the basis of an efficiently running economy and of social cohesion. As John Maynard Keynes observed, “there is no subtler, no surer means of overturning the existing basis of society than to debauch the currency”.
5 However, the interaction of a persistent aggregate demand shock and inertia in the economy can considerably prolong the time for which the economy is in a state of excess demand pressure. Figure 4 illustrates this point by showing the response of an aggregate demand shock with a half-life of only two quarters in a stylised model of monetary policy with typical parameter settings.