Where would the interest rates of the Federal Reserve and the ECB be today if they pursued the same inflation targeting policy as in the past?
It can be considered that the subprime crisis in 2008-2009 led to a significant change in central bank behaviour. After this crisis, they were much more concerned about growth, full employment, reducing inequality, etc. We therefore look at how central banks would have reacted to the current situation (inflation and rapid decline in unemployment) if they had still behaved as they did from 1995 to 2008; at that time, we can consider that they were practising inflation targeting, that is, they were reacting to inflation and to the cyclical situation. We see that if we had the same central banks today as from 1995 to 2008, then: The Fed funds rate would now be 8%; The ECB’s repo rate would now be 3.6%. This shows: The extent of the changes in central bank behaviour since the subprime crisis; The way forward today if central banks really wanted to combat inflation.