Theory also tells us that efforts to minimize one type of error result in maximizing the other type of error. So, where should the balance lie? Even if there is arguably a new normal for inflation, wouldn’t it be more prudent to err on the side of caution?
And what will be the price to be paid for that prudence on the inflation front in terms of lost growth? 32. Central banks face a complex policy choice in managing the growth-inflation balance. Experience shows that policy mistakes cannot easily be reversed in short order, and typically not before heavy costs have been paid by way of welfare loss.