Why trust in the central bank is important

She view has been widespread among economists for decades that trust in the central banks’ promise of stability is the decisive factor in the fight against inflation. This view spread after attempts to forecast inflation using simple measures such as money supply or national debt failed.

Experience has shown that in quite a few episodes in economic history a strong expansion of the money supply was followed by inflation. In quite a few other episodes, however, inflation by no means followed growth in the money supply.

The relationship between money supply and inflation, which monetarists like Milton Friedman once believed to be very stable, has proven unreliable. Therefore, the attempt to control inflation primarily through the money supply has long been abandoned by monetary policy.

Playing with fear

The relationship between national debt and inflation is also not clear. There are many examples from Latin America, for example, in which high national debt led to inflation. But there are counterexamples such as 19th century Great Britain, which had high national debt for decades. This did not harm the status of the pound sterling as the leading currency in the world.


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