Modern central banking frameworks emerged in an environment characterized by relatively stable supply conditions, expanding globalization, and inflation driven largely by aggregate demand. Since the 1990s, inflation targeting and central bank independence have helped maintain price stability and anchor expectations. However, successive disruptions have exposed the limitations of frameworks designed primarily to manage demand-driven inflation. The COVID-19 pandemic, Russia’s invasion of Ukraine in 2022, and the war involving the United States, Israel, and Iran that began on February 28, 2026, have demonstrated that large, overlapping supply shocks are becoming a recurring feature of the global economy. Geoeconomic fragmentation and climate-related disruptions are likely to reinforce this trend.
This paper examines whether existing monetary policy frameworks remain effective when inflation increasingly originates from supply constraints rather than excess demand. It argues that the challenge is institutional rather than merely technical. Inflation targeting and central bank independence remain essential safeguards against political interference and inflationary bias. Nevertheless, central banks require more adaptive mandates, improved analytical capabilities, and stronger coordination mechanisms to distinguish temporary disturbances from persistent shocks and respond without imposing unnecessary costs on growth and employment.
The experience of the 1970s provides an important historical reference. The oil shocks exposed the dangers of accommodating inflationary pressures and allowing temporary price increases to become embedded in wages and expectations. The subsequent development of independent central banks and credible inflation-targeting frameworks helped establish modern monetary stability. However, today’s disruptions spread through interconnected supply chains, financial markets, and trade networks. Higher interest rates cannot directly increase energy supplies, restore shipping routes, or resolve production bottlenecks. Excessive tightening may therefore deepen economic contractions without addressing the underlying causes of inflation.
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