Problem with interest rates as a control

Posted Aug 23, 2022 12:38 UTC (Tue) by farnz (subscriber, #17727)
In reply to: Just the first step by nilsmeyer
Parent article: Tornado Cash and collateral damage

And the difficulty is that interest rates only really affect the demand side of the supply + demand curves. You can use interest rates to adjust demand to keep inflation down if the root cause of inflation is excessive demand - in other words, people buying more than they absolutely need. In at least one economic model, this is the only cause of inflation.

The situation gets difficult if you have supply shortages, such that people can't afford a full set of essentials; interest rates allow you to influence demand, but there are some things that people will pay everything they have to keep getting (shelter, food, water). If these things are in restricted supply, then central banks are stuffed - they have no tools for affecting supply side, and if that's where inflation is coming from, keeping it in check is outside their competence.