The entire theory of monetary policy developed since the 1980s has just collapsed

Since the 1980s, monetary policy theory has led to quite simple rules of action for central banks, which they have chosen to follow. They are: Central banks must remain credible, i.e. not allow expected inflation to rise in the event of an inflationary shock; For central banks to remain credible, they must not be allowed to use inflation to: Boost growth and employment; Ensure public debt sustainability; The simplest way is then to separate tasks: central banks deal only with controlling inflation (hence inflation targeting). We see that all this is now gone: inflationary shocks drive up expected inflation, central banks tolerate inflation so as to not cause activity to fall, central banks practise “fiscal dominance” (they ensure public debt sustainability while fiscal policy remains expansionary) and they have new objectives (employment, inequality, etc.). The entire body of theory guiding central bank action since the early 1980s has therefore disappeared. It will now be difficult and painful if central banks want to regain their anti-inflationary credibility.