The article discusses the concept of “observational equivalence,” which means that multiple explanations for a situation can be compatible with the available data. The author refers to the recent retreat of top central bankers in Portugal, where they discussed the challenge of falling but still high inflation levels. Despite acknowledging the uncertainties surrounding inflation, the central bankers emphasized the need for tight monetary policy and projected certainty in their approach.

The author questions why rising uncertainty would make policymakers more determined instead of less. They argue that greater uncertainty justifies tighter monetary policy, as it is easier to correct excessive tightening than to undo the damage of not pushing inflation down enough. However, the author presents an alternative explanation for the behavior of inflation. They suggest that inflation is naturally declining due to the reversal of supply shocks, and monetary tightening is coming too late to have a significant impact. If this explanation is correct, central banks could potentially make the situation worse by implementing tight monetary policy.

The author highlights the importance of considering different explanations and being open to data that can break the tie between competing theories. They argue that the case for tightening monetary policy relies on the improbability of their alternative explanation, but it is crucial to critically evaluate the evidence and not take tightening for granted.

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By hassani

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