Economic Commentary: Inflation, unemployment and monetary policy

Date 05/03/2013

Since the inflation target was introduced, the average rate of inflation has been low and stable, but also somewhat lower than the inflation target of 2 per cent. This has led to a debate about whether monetary policy has been too tight and about the consequences for unemployment.

In this Commentary, the authors point out that inflation and unemployment are affected by many different factors, not just by monetary policy. The simple link between inflation and unemployment reflected in the Phillips curve in itself says nothing about the effects of monetary policy. Simulations using a macro model indicate that monetary policy has less of an impact on unemployment than suggested in the debate.

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