There are two ways, the world’s central bankers learned at this year’s Jackson Hole conference in Wyoming, to tame a horse. You can break the animal with fear, but it will never forget the pain. The kinder way, demonstrated to attendees one evening, is to establish consistent boundaries, enforced with gentle consequences like noisy clapping. This, says Martins Kazaks, president of the Bank of Latvia, is much like central banking. Although you can raise interest rates to crush inflation, at the cost of a recession, it is better when everyone believes in the inflation target, such that nobody raises prices and wages in the first place. If the boundaries are credible, the central bank can be gentler.
