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Monetary tightening, inflation drivers and financial stress

Author

Listed:
  • Frederic Boissay
  • Fabrice Collard
  • Cristina Manea
  • Adam Shapiro

Abstract

TThe 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.

Suggested Citation

  • Frederic Boissay & Fabrice Collard & Cristina Manea & Adam Shapiro, 2023. "Monetary tightening, inflation drivers and financial stress," BIS Working Papers 1155, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:1155
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    More about this item

    Keywords

    supply– versus demand–driven inflation; monetary tightening; financial stress;
    All these keywords.

    JEL classification:

    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • G01 - Financial Economics - - General - - - Financial Crises

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