Stopping inflation
There are a number of methods which have been suggested to stop inflation.
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Monetary policy
Central banks such as the U.S. Federal Reserve System can affect inflation to a significant extent through setting interest rates and through other operations (i.e., using monetary policy). High interest rates (and slow growth of the money supply) are the traditional ways that central banks fight inflation, using unemployment and the decline of production to prevent price increases.
However, Central Banks view the means of controlling the inflation differently. For instance, some follow a symmetrical inflation target while others only control inflation when it gets too high. The European Central Bank has come under some criticism for following the latter practice, especially in the face of high unemployment.
* Monetarists emphasize increasing interest rates by reducing the money supply through monetary policy to fight inflation.
* Keynesians emphasize reducing demand in general, often through fiscal policy, using increased taxation or reduced government spending to reduce demand. They also note the role of monetary policy, particularly for inflation in basic commodities from the work of Robert Solow.
* Supply-side economists advocate fighting inflation by fixing the exchange rate between the currency and some stable reference currency such as gold, or by reducing marginal tax rates in a floating currency regime to encourage capital formation.
All of these policies are achieved in practice through a process of open market operations.
