Central banks including the Federal Reserve will fail to curb inflation unless governments start to be responsible for spending, according to a study presented to central bankers at a Jackson Hole conference in Jackson Hole, Wyoming.
The authors of the study, Francesco Bianchi of Johns Hopkins University and Leonardo Melosi of the Chicago Fed, warned that increasing interest rates would end up in stagnation without adequate constraints on government spending.
“If the monetary tightening is not supported by the expectation of appropriate fiscal adjustments, the deterioration of fiscal imbalances leads to even higher inflation pressure. As a result, a vicious circle of rising nominal interest rates, rising inflation, economic stagnation, and increasing debt would arise,” they wrote in the study (pdf)….