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.
JEL codes
- E1: General Aggregative Models
- E3: Prices, Business Fluctuations, and Cycles
- E6: Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
- G01: Financial Crises
Reference
Frédéric Boissay, Fabrice Collard, Cristina Manea, and Alan Shapiro, “Monetary Tightening and Financial Stress During Supply- versus Demand-Driven Inflation”, International Journal of Central Banking, vol. 21, n. 2, April 2025, pp. 147–220.
Published in
International Journal of Central Banking, vol. 21, n. 2, April 2025, pp. 147–220