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

Author

Listed:
  • Frédéric Boissay

    (BIS - Bank for International Settlements)

  • Fabrice Collard

    (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - Comue de Toulouse - Communauté d'universités et établissements de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, CNRS - Centre National de la Recherche Scientifique)

  • Cristina Manea

    (BIS - Bank for International Settlements)

  • Alan C. Shapiro

    (Federal Reserve Bank of San Francisco)

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.

Suggested Citation

  • Frédéric Boissay & Fabrice Collard & Cristina Manea & Alan C. Shapiro, 2025. "Monetary Tightening and Financial Stress During Supply- versus Demand-Driven Inflation," Post-Print hal-05273537, HAL.
    • Handle: RePEc:hal:journl:hal-05273537
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