To Someone With Only a Hammer, Everything Looks Like a Nail: A Discussion on Interest Rate Policy in Light of the Recent Inflationary Episode

Abstract

The logistical problems caused by the disruptions of global value chains following the COVID-19 Pandemic have given riseto a new episode of inflation. Based on the analysis of the literature on the use of conventional monetary policy tomanage this type of conjuncture, together with the empirical evidence presented, in this paper we raise threequestions: i) the need to address what elements are causing this episode of price increase; ii) discuss the strategy toeffect a market-led change of energy model, where bottlenecks, rising prices of energy and certain scarce commoditiesand the concentration of firms is the norm and iii) convey the political implications of this transitory episode foreconomic policy with a proposal for a new framework of monetary-fiscal coordination facilitating a restoration of thereal terms of trade.