Monetary Tightening and Financial Stress During Supply- versus Demand-Driven Inflation

Frédéric Boissay, Fabrice Collard (), Cristina Manea and Alan C. Shapiro
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Frédéric Boissay: BIS - Bank for International Settlements
Fabrice Collard: TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - Comue de Toulouse - Communauté d'universités et établissements de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, CNRS - Centre National de la Recherche Scientifique
Cristina Manea: BIS - Bank for International Settlements
Alan C. Shapiro: Federal Reserve Bank of San Francisco

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Abstract: This paper explores the state-dependent effects of a monetary tightening on financial stress, focusing on a novel dimension: whether inflation is driven by supply versus demand factors at the time of the policy intervention. These underlying factors likely affect the economy's financial resilience to a monetary tightening. We estimate the effects of high-frequency identified monetary surprises on financial stress, differentiating the effects based on whether inflation is supply- or demand driven. We find that financial stress increases after a tightening when inflation is supply-driven, whereas it remains roughly unchanged or even declines when inflation is demand-driven.

Keywords: Financial stress; Monetary tightening; Supply– versus demand–driven inflation (search for similar items in EconPapers)
Date: 2025-04
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Published in International Journal of Central Banking, 2025, 21 (2), pp.147-220

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-05273537

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