Question

Can policy makers decrease inflation without causing a recession? If yes how and if no why not?

Answer 1

The orthodox response is "no." if they accept the "inertia" hypothesis of inflation (that today's inflation rate is triggered by yesterday's inflation, the state of the economic cycle, and external forces including import prices) or the hypothesis of "fair expectations" (that inflation is triggered by the aspirations of workers and employers, combined with a lack of stable monetary and fiscal policies), economists agree that tight monetary and fiscal policies, which cause recessions, are necessary to decelerate inflation.

They point out that many European countries and the United States conquered high inflation (by the standards of these countries) in the 1980's, but only by applying tight monetary and fiscal policies which increased unemployment sharply. Nevertheless, policymakers of some governments maintain that strict wage and price caps, without strong monetary and fiscal policies, may be effective in lowering inflation.

Unfortunately, as this approach fails to address the underlying causes of inflation, wage and price control eventually collapses, the hitherto-repressed inflation resurfaces, and while policymakers manage to avoid a recession, a frozen relative pricing structure imposes distortions that harm the economy's long-term growth prospects.