Contrary to a widely held notion, monetary policy is as effective against inflation caused by a positive demand shock as against inflation caused by a negative supply shock

It is too often claimed that a restrictive monetary policy: Would be effective against inflation resulting from a positive demand shock (rapid credit growth, fiscal deficits, etc. ); But would be ineffective against inflation resulting from a negative supply shock (rising commodity prices, increasing corporate profit margins, etc.). In reality, there is no difference between the two types of inflation in terms of the effectiveness of a restrictive monetary policy: reducing demand for goods and services eliminates inflation whatever its source. The difference is in the acceptability of a restrictive monetary policy, not its effectiveness. In the case of inflation caused by a positive demand shock, the correction of the shock will eliminate the additional demand, but will not depress the economy relative to normal. In the case of inflation caused by a negative supply shock, the correction of the shock will further depress an economy that is already depressed by the negative supply shock.