Monetary policy

Borağan Aruoba, Thomas Drechsel, 17 May 2022

The recent surge in inflation has put central banks back into the spotlight. This column proposes a novel method to determine exogenous changes in monetary policy. Using information in the language of documents that economists at the Federal Reserve Board prepare for Federal Open Market Committee meetings, it predicts changes in the target interest rate and obtains a measure of monetary policy shocks as the residual. The dynamic responses of macroeconomic variables to the identified shock measure are consistent with the theoretical consensus, and the estimated shocks are not contaminated by the ‘Fed information effect’.

Ricardo Reis, 13 May 2022

If you're going to drop lots of money from a helicopter, what will happen to the economy? When would it make a difference, and to who? Helicopter money is increasingly being taken seriously as policy. Ricardo Reis tells Tim Phillips whether helicopter money really can solve our economic problems.

Download the free DP and read more about this research:
Reis, R and Tenreyro, S. 2022. 'Helicopter money: what is it and what does it do?'. London, Centre for Economic Policy Research.

Guillaume Daudin, Violaine Faubert, 13 May 2022

The rise of global value chains has led to a greater use of input-output tables to study international linkages. This column analyses cost-push inflation using world input-output tables. In the light of the recent surge in commodity prices, it explores which countries are most vulnerable to energy cost-push inflation and documents the large exposure of Eastern and central European economies to a rise in Russian hydrocarbon prices. Input-output tables are used to document the heterogeneous reactions of consumer prices to exchange rate variations across countries, reflecting differences in foreign product content of consumption and intermediate products.

Francesco D'Acunto, Ulrike Malmendier, Michael Weber, 07 May 2022

Inflation has surged to historic levels around the globe. Designing the correct policy responses requires a deep understanding of how consumers form and update their inflation expectations, and how expectations influence economic behaviour. This column summarises key findings in the literature on inflation expectations, particularly how they deviate from the full-information rational expectations paradigm. Household inflation expectations are typically biased upwards, systematically skewed, and correlated with social/demographic characteristics. Studying these heterogeneities and their impact on aggregate outcomes is a key challenge for policymakers going forward. 

Yunjong Eo, Luis Uzeda, Benjamin Wong, 29 April 2022

Supply chain disruptions and labour shortages coupled with demand-side pressures have seen goods inflation soaring since early 2021. This column shows that while goods inflation used to contribute to permanently higher headline inflation, such as during the Great Inflation of the 1970s, since the early 1990s it has become predominantly transitory. The current high goods inflation can therefore be expected to be somewhat short-lived. Nonetheless, the authors document that the upside risks to longer-term aggregate and sector-specific inflation remain greater than usual. 

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