By Isabel Schnabel
Monetary policy and good luck, that is smaller economic shocks, played an important role during the Great Moderation, a period of broad macroeconomic stability. Following the pandemic and the war in Ukraine, there are reasons to believe that policymakers will find themselves in a less favourable environment over the medium term – one in which shocks are potentially larger, more persistent and more frequent. In this environment, central banks need to act forcefully to protect price stability and prevent a transition to a period of “Great Volatility”. Three broad observations speak in favour of forceful action by central banks: (1) the uncertainty about the persistence of inflation, (2) the threats to central bank credibility and (3) the potential costs of acting too late.