Quote:How to stop inflation*?

Facts:
1) The Fed’s Chairman intends to pare back inflation to 2%. He says it is Fed’s primary goal despite any fiscal policy* implemented by the government.
2) U.S. federal debt has been growing since 2000 and is currently around 120% of the U.S. GDP.

Analysis:
1) There are two main views on how to control inflation. The first one stems from the neo-classical economic theory*. The opposing is the “fiscal theory of the price level” (FTPL).
2) Neo-classical economists argue that inflation is under the Central Bank’s control. Indeed, the neo-classical school supports the view that money supply* shifts are the only possible reason for inflation. Therefore, the CB should be able to fix inflation regardless of fiscal policy.
3) On the contrary, FTPL argues that the government that runs unsustainable deficits would have to finance its debt by printing money, causing inflation. The CB would just increase the cost of debt service by raising interest rates, making inflation even more challenging to control.
4) Both views are debatable, though the world CBs and governments should be cautious about the ramifications of their monetary* and fiscal policies nowadays.