Conventional monetary policy reactions might not be appropriate in circumstances where we see a combination of rising inflation, slowing GDP growth, and concerns about financial instability. Rising inflation, for example, often leads to calls for tighter monetary policy. Yet, would that be wise if a slowing economy and other developments were expected to reverse these inflation pressures in the future?
Slower economic activity often leads to calls for easier monetary policy. But would that reaction be wise if inflation pressures were believed to be rising rather than receding? Around the world, monetary authorities are determined not to repeat the policy errors of the 1970s, when overly stimulative measures led to double-digit inflation and rising inflation expectations.