Interest rate hikes are less powerful in reducing inflation than conventional wisdom suggests
Matthias Enzinger | Vienna University of Economics and Business
Sebastian Gechert | Technische Universität Chemnitz
Philipp Heimberger | Vienna Institute for International Economic Studies (wiiw)
Franz Prante | Technische Universität Chemnitz
Daniel Fernandez Romero | Autonomous University of Madrid
Abstract
Based on a comprehensive collection of the empirical literature, this policy brief finds that conventional monetary policy is less effective in curbing inflation than widely assumed. Once the estimates are corrected for publication bias – the preference for statistically significant and theory-conformist results – a 100bp rate hike reduces output typically by less than 0.5% and prices by less than 0.25%, well below textbook predictions. Effects are smaller, slower, and less reliable than conventional wisdom suggests. Moreover, disinflation requires higher output costs. Consequently, monetary policy might be considered a less powerful lever for stabilizing prices and the economy.