We show that the underlying source of inflation impacts financial market perceptions of the persistence of monetary policy tightening. Investors expect policy tightening to be more persistent inflation is driven by demand factors. During supply-driven episodes, however, investors perceive tightening as less persistent and less effective at producing a disinflation. These results point to a state-dependent financial market response to monetary policy: credibility, and therefore financial-market transmission, depends on what kind of inflation the central bank is perceived to be fighting.
Suggested citation:
Najjar, Rami and Adam Hale Shapiro. 2025. “Not All Inflation Is the Same: State-Dependent Transmission of Monetary Policy.” Federal Reserve Bank of San Francisco Working Paper 2025-28. https://doi.org/10.24148/wp2025-28