The Rationale Behind Policymaker Hesitancy:Insight Into Correlation Between Disinflation and Interest Rates

This essay explores the reluctance of policymakers to reduce interest rates during disinflation,analyzing whether this hesitation aligns with prevailing economic theories.Drawing on historical and contemporary examples,the paper examines how monetary policy,particularly central bank credibility,plays a crucial role in shaping market expectations and guiding long-term economic behavior.It discusses the evolution of monetary strategies from the high inflation periods of the 1970s and 1980s to the modern focus on inflation targeting,financial stability,and the globalized economy.The analysis highlights key factors such as asymmetric risks,the challenge of managing low interest rates,and the potential for unintended consequences like a sset bubbles and distorted savings behavior.Ultimately,the paper concludes that central banks’cautious approach during disinflation reflects a commitment to maintaining price stability and protecting economic resilience in an increasingly interconnected global financial system.