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

F. Boissay, F. Collard, C. Manea and A. Shapiro
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F. Boissay: Bank for International Settlements
F. Collard: Toulouse School of Economics (CNRS)
C. Manea: Bank for International Settlements
A. Shapiro: Federal Reserve Bank of San Francisco

International Journal of Central Banking, 2025, vol. 21, issue 2, 147-220

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

Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:ijc:ijcjou:y:2025:q:2:a:4

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