To me, the answer to this question seems obvious.  The central bank.  But lots of very smart people don’t agree.

MMT proponents believe that when inflation is lower than target it can be increased only with fiscal stimulus—monetary policy is ineffective.  Similarly, they believe that high inflation can only be reduced with higher taxes or lower spending.

On the right, some economists advocate a fiscal theory of the price level, the view that Congress determines the inflation rate through its spending and tax decisions (including actions that change the future expected path of fiscal policy).

Nick Rowe links to a Stephen Gordon tweet showing how inflation averaged 2% after the Bank of Canada adopted a 2% inflation target in 1991:

For someone like me, this graph is completely uninteresting.  But for the economists who believe the BOC is unable to control inflation, it calls for an explanation.  Perhaps due to some weird coincidence, Canada’s parliament decided in the early 1990s to adjust its tax and spending policies in such a way as to keep inflation at roughly 2%, on average.

(Just kidding)

Nick Rowe is alluding to the fact that most central banks have some sort of dual mandate.  Thus the volatility in inflation since 1991 is not necessarily a sign of the BOC’s inability to prevent short run fluctuations in inflation.  However, in this case I suspect that the policy was indeed imperfect, as Nick suggested.  For instance, the brief period of deflation in 2009 was not done to offset excessively high employment levels.  Rather it represented a policy error by the BOC—policy was too tight to achieve either central bank policy goal.

PS.  In another tweet, Nick says:

Any central bank that wants to maximise sustainable/average employment will need to:

1. Increase employment some times.

2. Reduce employment other times.

Grasping that 2nd bit is hard. Figuring out which is which is even harder. (It’s like catching fish, but different.)

If you want to see what happens when the second point is overlooked, look at Canadian inflation from 1953 to 1981.

PPS.  Whenever I post on MMT, its proponents tell me that I’ve misrepresented their model.