Raising interest rates was the wrong medicine

Abstract

PurposeIn this paper, the authors examine the causes of 2021–2023 inflation and evaluate whether raising interest rates is the right solution.Design/methodology/approachThe authors evaluate both the macroeconomic (too much demand) and microeconomic (monopoly pricing and supply chains) explanations for the causes of inflation.FindingsThe authors argue that the spike in inflation is due to disrupted supply chains and corporations taking advantage of the situation to raise their prices. The aggregate demand stimulus from fiscal policy had all but played out by the time inflation arose, making it an unlikely cause of said inflation.Originality/valueThe authors' paper demonstrates that raising interest rates is the wrong solution to tackling the problem of inflation, especially since it's coming from the supply side.