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Does Financial Dominance Explain the Recent Rise in Inflation?

  • Adalbert Winkler EMAIL logo
From the journal The Economists’ Voice

Abstract

This paper addresses the question whether the recent rise in inflation can be explained by financial dominance. It is motivated by the fact that the monetary policy response has been slow and timid which might have reflected concerns that a proper response would have triggered substantial financial risks. We find that a misjudgement of aggregate supply conditions provides a better explanation than financial dominance arguments. Still, recent policy moves such as the Transmission Protection Instrument by the European Central Bank and asset purchases by the Bank of England indicate that financial dominance concerns might become more pressing with further monetary tightening.


Corresponding author: Adalbert Winkler, Frankfurt School of Finance & Management, Frankfurt am Main, Germany, E-mail:

This paper is based on a contribution to the ZEW Workshop “Das EZB-Zielsystem – angemessene Ausdifferenzierung oder drohende Überfrachtung“ (The goals of the ECB – a useful differentiation or excess baggage?), Mannheim, 31. Mai 2022. I thank the editor, Friedrich Heinemann, and an anonymous referee for useful comments and suggestions on an earlier version of the paper.


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Received: 2022-10-17
Accepted: 2022-11-21
Published Online: 2022-12-08

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