Is raising interest rates by the central bank a more effective tool for fighting inflation or is it rather government intervention in the form of price regulation and subsidies?
Inflation is one of the most important challenges for monetary and fiscal policy. Central banks usually raise interest rates to limit the money supply and reduce inflationary pressure, but such a move can simultaneously weaken economic growth and increase unemployment. On the other hand, governments can use price regulations, subsidies and grants to mitigate the effects of inflation on citizens, but such measures can lead to market disruptions and further deepen economic imbalances. The question is whether it is better to fight inflation with classic monetary tools or with fiscal policy and administrative price regulation. For the purposes of this discussion, I have formulated the following research thesis, according to which raising interest rates by the central bank is a more effective tool in the long term, while government interventions may have short-term effects but lead to further market disruptions. This problem is therefore interdisciplinary in nature, as it affects both macroeconomics and economic policy. It requires an analysis of the impact of interest rates on the demand and supply of money, but also of the effects of government intervention on price dynamics and market behaviour. The final answer may depend on the economic context of the country concerned, the level of public debt, the structure of the labour market and the scale of global economic disruption.
My articles below are related to the above issue in some aspects:
THE POST-COVID RISE IN INFLATION: COINCIDENCE OR THE RESULT OF MISGUIDED, EXCESSIVELY INTERVENTIONIST AND MONETARIST ECONOMIC POLICIES
Article THE POSTCOVID RISE IN INFLATION: COINCIDENCE OR THE RESULT O...
I have described the key aspects of the monetary policy pursued by central banks in recent years in the following article:
Comparisons of the monetary policy of the central banks of the Federal Reserve Bank and the European Central Bank and the National Bank of Poland
Chapter Comparisons of the monetary policy of the central banks of t...
I have written about the mild, synchronised monetary policy during the global financial crisis of 2008-2009 in the following articles, among others:
Analysis of the effects of post-2008 anti-crisis mild monetary policy of the Federal Reserve Bank and the European Central Bank
Article Analysis of the effects of post-2008 anti-crisis mild moneta...
ACTIVATING INTERVENTIONIST MONETARY POLICY OF THE EUROPEAN CENTRAL BANK IN THE CONTEXT OF THE SECURITY OF THE EUROPEAN FINANCIAL SYSTEM
Article ACTIVATING INTERVENTIONIST MONETARY POLICY OF THE EUROPEAN C...
What do you think about this?
What is your opinion on this issue?
Please answer,
I invite everyone to the discussion,
Thank you very much,
Best regards,
I invite you to scientific cooperation,
Dariusz Prokopowicz
I believe it is particularly effective to address inflation through a dual approach: long-term management by central banks and short-term intervention by governments. Central banks can provide stability and anchor inflation expectations over time, while governments are better suited to respond to immediate shocks and social impacts. Ultimately, the success of this strategy depends on strong coordination between the two. Without such coordination, policy measures may prove either inadequate or even counterproductive.
Raising interest rates is generally more effective and sustainable than government intervention in controlling inflation. Monetary policy directly reduces excess demand, works systemically, and maintains market credibility. While subsidies and price controls can offer short-term relief during supply shocks, they often distort markets and strain public finances. Therefore, central banks should lead the fight against inflation, with governments playing a supporting role when necessary.
La respuesta no es una u otra, sino que ambas herramientas tienen roles importantes en la gestión de la inflación, pero con diferentes implicaciones y efectividad dependiendo del contexto. Sin embargo, un aumento agresivo de las tasas de interés, como única o principal herramienta, se ve con cautela y a menudo se considera una solución incompleta y potencialmente dañina, favoreciendo en muchos casos una política fiscal intervencionista selectiva, por lo que podemos concluir que si bien el aumento de las tasas de interés puede tener un papel limitado en enfriar una demanda agregada excesiva, lo que podriamos ver como una política fiscal intervencionista selectiva y bien diseñada como una herramienta más efectiva y justa para combatir la inflación, especialmente cuando esta tiene raíces en problemas de oferta o en el poder de mercado. Esta política permite una respuesta más matizada y la protección de los grupos más vulnerables, al tiempo que aborda las causas subyacentes de la inflación y promueve objetivos sociales más amplios yo abogaría por una combinación de herramientas, donde la política monetaria juega un papel, pero subordinada a una estrategia fiscal activa que priorice el bienestar de la mayoría y la sostenibilidad a largo plazo.
Raising interest rates is often more effective in directly controlling inflation because it targets demand by increasing the cost of borrowing, thereby reducing spending and investment; however, interventionist fiscal policy—like reducing government spending or increasing taxes—can complement monetary measures, especially when inflation is driven by both demand and supply factors.
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