Abstract

After three decades of price stability in most advanced economies, the sharp rise in inflation in 2021-22 took both the public and policy makers by surprise. After about two years of monetary tightening, inflation has come down significantly and the 2% target is now in sight, albeit more so for some economies than for others. Two main issues are discussed in this lecture. The first concerns the supposed failure of monetary policy to prevent, or initially contain, the inflationary shock. The second focuses on monetary policy’s role and effectiveness in promoting the return to price stability. In particular, differences in the response of aggregate demand and anticipated inflation are considered, and different views on the conduct of monetary policy are addressed.