Monetary Shocks and Inflation: Global Evidence from Trilemma-Based Identification

Cameron Haas (), Mateo Hoyos, Emiliano Libman, Guilherme Martins and Arslan Razmi ()
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Cameron Haas: Department of Economics, UMass Amherst
Arslan Razmi: Department of Economics, UMass Amherst

No DTE 650, Working Papers from CIDE, División de Economía

Abstract: After decades of low and stable inflation, recent global events —such as the COVID-19 pandemic and the Russian invasion of Ukraine—triggered a resurgence in inflationary pressures, prompting central banks worldwide to tighten monetary policy. This paper examines whether monetary policy effectively curbs inflation by employing a trilemma-based identification strategy on a panel dataset of 36 developing and 8 developed economies from 1990 to 2017. Using higher-frequency monthly data, we improve on traditional quarterly or annual approaches by more precisely capturing central bank responses. By applying our theory-driven, trilemma-based identification strategy to a sample of developing countries, we bring novel insights to existing literature. Our findings indicate that monetary policy shocks have significant but impermanent effects on inflation. A 100 basis point interest rate hike lowers the price level by 3.7% at its peak after six months, with effects fading within 18 months. Crucially, our results do not exhibit the “price puzzle,” reinforcing the credibility of our identification strategy. Additionally, we find that monetary policy effects are state-dependent, with stronger disinflationary impacts during high-inflation periods and in economies with lower GDP per capita or higher commodity export dependence. These findings highlight the heterogeneity in monetary policy transmission, underscoring the need for tailored policy responses across different economic contexts.

Keywords: interest rates; monetary experiments; trilemma; instrumental variables; local projections (search for similar items in EconPapers)
JEL-codes: E01 E30 E32 E44 E47 E51 F33 F42 F44 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2025-05
New Economics Papers: this item is included in nep-cba, nep-cis, nep-mac, nep-mon and nep-opm
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