02.04.2024: Cristina Manea – Monetary tightening, inflation drivers and financial stress

Presenter: Cristina Manea.
Affiliation: Bank for International Settlements, Monetary and Economic Department.

Paper: Monetary Tightening, Inflation Drivers and Financial Stress.

Date: April 02, 2024.
Time: 13:00 GMT (15:00 Israel Time)

Abstract: The paper explores the state–dependent effects of a monetary tightening on financial stress, focusing on a novel dimension: the nature of supply versus demand inflation at the time of policy rate hikes. 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 (e.g. due to adverse supply or cost–push shocks) or demand–driven (e.g. due to positive demand factors). We find that financial stress flares up after a policy rate hike when inflation is supply–driven, but it remains roughly unchanged, or even declines when inflation is demand–driven. Our findings point to a particular tension between price stability and financial stability when inflation is high and largely supply–driven.

Coauthors: Frederic Boissay (BIS), Fabrice Collard (Toulouse School of Economics), and Adam Shapiro (Federal Reserve Bank of San Francisco).

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