Central banks focusing on price stability significantly reduce inflation: study

Central banks focusing on price stability significantly reduce inflation: study

(Seoul=Yonhap News) Reporter Kim Yu-a = A study has found that central banks, such as the Bank of Korea and the U.S. Federal Reserve (Fed), significantly reduce inflation (price increases) as they focus more on their inherent objective of price stability.

Kang Hyun-joo and Noh Sung-ho, researchers at the Korea Capital Market Institute, presented their findings as speakers at the 'Finance and Corporations in an Era of Great Transformation: From Technological Innovation to the Role of Central Banks' symposium, jointly hosted by the Korean-American Finance Society and the Korea Institute of Finance, on the 11th in Yeouido, Seoul. They stated, "While the diversification of central banks' policy interests is inevitable, the core mission of price stability must come first."

In their analysis of 9,802 speeches from 24 countries' central banks and the European Central Bank (ECB) between 2009 and June 2024 to examine the policy focus of central banks, they identified 25 detailed topics and derived nine mid-level categories: monetary policy, financial stability, payment settlement, financial inclusion, climate change, and regional economies.

Kang and Noh explained, "Central banks' policy interests are changing according to the economic environment and social demands, and their roles have expanded to various policy tasks beyond traditional monetary policy areas."

Specifically, they analyzed that while discussions on financial stability accounted for 47% immediately after the global financial crisis in 2010, this figure decreased to 18.9% in 2024. New topics such as financial inclusion (12.7% in 2012) and climate change (23.1% in 2021), as well as payment settlement (14.1% in 2021), have emerged.

They further explained that the U.S. Federal Reserve's financial inclusion discussions reached 25.6% between 2020 and 2022, significantly higher than other central banks. The proportion of climate change discussions at the ECB in 2021, coinciding with the European Union's (EU) green policy initiatives, reached 29.5%.

However, they concluded that as interests increased, policy signals became diluted, and conversely, as focus intensified, it aided price stability. They emphasized, "When central banks' policy messages shifted from 'diversified' to 'focused,' inflation decreased by approximately 0.31 percentage points after eight quarters."

They added, "(Major countries') governments are avoiding difficult decisions like structural reforms and demanding excessive roles from central banks. Other policy actors must faithfully fulfill their respective responsibilities to create an environment where central banks can concentrate on their inherent mission."

They concluded, "Central banks need to participate in structural reform discussions to ensure the effectiveness of monetary policy, respond to various social demands, and yet maintain a clear priority on their core mission of price stability."