Central bank interest rates lose their power to control the economy once inflation rises high enough to break price stickiness.
April 25, 2026
Original Paper
ENDOGENOUS PRICE STICKINESS AND THE LIMITS OF MONETARY POLICY
SSRN · 6578038
The Takeaway
Monetary policy relies on the fact that most prices do not change instantly. When inflation becomes very high, companies begin adjusting their prices constantly, which destroys the transmission mechanism of the central bank. This creates a double trap where a government loses its ability to manage the economy just when it needs it most. Fiscal tools also become less effective at the same time, leaving the country with no way to stop a downward spiral. The belief that a central bank can always fix inflation is a luxury of low-inflation regimes. High-inflation environments operate under a completely different set of economic rules.
From the abstract
Firms adjust prices more frequently when inflation is high. This paper incorporates this empirical regularity into the New Keynesian Phillips curve by allowing the Calvo stickiness parameter to depend on aggregate inflation. The modification implies that monetary policy is effective at low inflation but loses traction as inflation rises-eventually becoming impotent. Estimating the Phillips curve slope by inflation regime in a global panel, I find a nearly 500-fold increase from low to very high