inflation, europeDuring the current financial crisis, many people expect a steady increase of the inflation rate during the next years. Which mechanisms does a country have to control the inflation rate? Printing new money is an obvious one, but I am looking for other mechanisms that are not that transparent.
Redefine inflation. Change what’s in the basket of goods and services used to measure inflation, or change the relative weights of different items in the basket.
Fiscal policy. Reducing government spending or increasing taxation will tend to reduce inflation (unless you increase taxes that are included in your measurement of inflation, e.g. sales taxes).
Manipulation of the exchange rate. For example, Switzerland is holding down the value of the Swiss franc, which will tend to increase inflation by making exports more expensive.
Join a currency union such as the Eurozone.
Tighten or loosen credit conditions (e.g. bank reserve requirements) to reduce or increase bank lending and thus inflation.
The problem is that nearly everything you can do to reduce inflation will also hurt your general economy – there are very few ways to reduce inflation while stimulating the economy.
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