<p>During an inflation spiral central banks will reduce the demand for goods by increasing the cost of money, thereby halting inflation but negatively impacting growth.</p>
<p>Rather than putting a brake on demand, why don't central banks stimulate supply?</p>
<p>I'm sure there are plenty more examples of how this could be done, but one might be to give central banks the permission to offset tarrifs and taxes. E.g. if the cost of consumer goods is increasing, the central bank could add a tariff offset to the importation of the goods, such that the effective tariff on importers would be reduced or even negative. This would not negate fiscal policy directly since the tarifs still apply, they are just <em>offset</em> in the form of credits paid for by the bank's balance sheet.</p>
<p>Another example might be for the central bank to redirect its asset purchasing programs to stimulate business which increase the supply of consumer goods and away from other industries so as to increase supply of consumer goods without reducing the central bank's balance sheet.</p>
<p>Could such actions allow an economy to arrest a positive feedback loop between wage growth and consumer prices without the need to constrain the money supply? Has something like this been done?</p>

CC BY-SA 4.0
2022-10-05T12:06:45.880Z
Tarifs and taxes are not decided by central banks but the government. Bond buying doesn't directly affect supply of goods and services (it increase money supply which would all else equal increase inflation).
Alex
CC BY-SA 4.0
2022-10-05T21:36:45.030Z
@Alex I've modified the question to hopefully make it clearer that this is a hypothetical, I'm not asking if central banks can affect tarifs and taxes, but the impact if they could. Regarding bond-buying, I've also modified the question to hopefully make it clearer. I'm asking if it's possible to increase the money supply in such a way that the deflationary impact it has on supply more than offsets the inflationary effect that it has on demand.
quant
<inflation><central-banking>
Why don't central banks regulate inflation by stimulating supply, rather than arresting demand?
quant
# Why don't central banks regulate inflation by stimulating supply, rather than arresting demand?

(Asked by: username_0 on 2022-10-05)

During an inflation spiral central banks will reduce the demand for goods by increasing the cost of money, thereby halting inflation but negatively impacting growth.

Rather than putting a brake on demand, why don't central banks stimulate supply?

I'm sure there are plenty more examples of how this could be done, but one might be to give central banks the permission to offset tarrifs and taxes. E.g. if the cost of consumer goods is increasing, the central bank could add a tariff offset to the importation of the goods, such that the effective tariff on importers would be reduced or even negative. This would not negate fiscal policy directly since the tarifs still apply, they are just *offset* in the form of credits paid for by the bank's balance sheet.

Another example might be for the central bank to redirect its asset purchasing programs to stimulate business which increase the supply of consumer goods and away from other industries so as to increase supply of consumer goods without reducing the central bank's balance sheet.

Could such actions allow an economy to arrest a positive feedback loop between wage growth and consumer prices without the need to constrain the money supply? Has something like this been done?

**Tags:** inflation, central-banking

> **Comments:**
> **username_1**: Tarifs and taxes are not decided by central banks but the government. Bond buying doesn't directly affect supply of goods and services (it increase money supply which would all else equal increase inflation).  
> **username_0**: @username_1 I've modified the question to hopefully make it clearer that this is a hypothetical, I'm not asking if central banks can affect tarifs and taxes, but the impact if they could. Regarding bond-buying, I've also modified the question to hopefully make it clearer. I'm asking if it's possible to increase the money supply in such a way that the deflationary impact it has on supply more than offsets the inflationary effect that it has on demand.  

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## 0 answers

