Report
Patrick Artus

What is central banks' reaction function?

Central banks choose monetary policy by reacting to: Unemployment (underemployment); Inflation; Changes in asset prices. How has this reaction function changed ? The weight of unemployment and the return to full employment has clearly increased; The weight of inflation has fallen and has become symmetrical (due to average inflation targeting); The reaction to asset prices is asymmetrical: central banks want to prevent asset prices from falling, but not from rising. This development is consistent with the introduction of fiscal dominance (central banks maintaining fiscal solvency); fiscal dominance leads to acceptance of low interest rates even if inflation is higher than the target, helps boost potential production (and therefore drives down unemployment), and leads to acceptance of high asset prices driven up by the low level of interest rates.
Provider
Natixis
Natixis

Based across the world’s leading financial centers, Natixis CIB Research offers an integrated view of the markets. The team provides support to inform Natixis clients’ investment and hedging decisions across all asset classes.

 

Analysts
Patrick Artus

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