The Illusion of Central Bank Control

This report examines the limited efficacy of central banks in controlling inflation, noting that most inflation deviations are driven by external factors like food and energy prices. It argues that central bank credibility is often bolstered by favorable exogenous conditions rather than policy intervention alone.

Key Takeaways

• 1.73% of pre-pandemic inflation deviations from trend in developed markets were driven by food and oil prices, which are outside of central bank control.
• 2.The output gap explains only about 15% of inflation variability, limiting the direct influence of monetary policy.

Table of Contents

• The illusion of central bank control

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