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

Frédéric Boissay, Fabrice Collard, Cristina Manea and Adam Shapiro

No 2023-38, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: The paper explores the state-dependent effects of a monetary policy tightening on financial stress, focusing on a novel dimension: whether inflation is driven by supply factors versus demand factors at the time of the policy intervention. We use local projections to estimate the effect of high frequency identified monetary policy surprises on a variety of financial stress measures, differentiating the effects based on whether inflation is supply-driven or demand-driven. We find that financial stress flares up after a monetary tightening when inflation is supply-driven whereas it remains roughly unchanged or even declines when inflation is demand-driven. Our findings point to a potential trade-off between price and financial stability when inflation is high and driven by supply factors.

Keywords: supply and demand; inflation; monetary policy tightening; financial stresses (search for similar items in EconPapers)
JEL-codes: E1 E3 E6 G01 (search for similar items in EconPapers)
Pages: 51
Date: 2024-08-12
New Economics Papers: this item is included in nep-eec and nep-mon
Note: Original title: Monetary Tightening, Inflation Drivers and Financial Stress. Original publication date: 2023/12/15
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Journal Article: Monetary Tightening and Financial Stress During Supply- versus Demand-Driven Inflation (2025)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedfwp:97503

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DOI: 10.24148/wp2023-38

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