Monetary Tightening, Inflation Drivers and Financial Stress


Frederic Boissay, Fabrice Collard, Cristina Manea, Adam Shapiro

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2023-38 | December 21, 2023

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.

Article Citation

Boissay, Frederic, Fabrice Collard, Cristina Manea, and Adam Shapiro. 2023. “Monetary Tightening, Inflation Drivers and Financial Stress,” Federal Reserve Bank of San Francisco Working Paper 2023-38. Available at