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Insights / Research BriefSep 20, 2023

Households’ Response to the Wealth Effects of Inflation

Philip Schnorpfeil, Michael Weber, Andreas Hackethal
While many households know about inflation and its erosive effect on nominal assets, most are unaware of inflation’s erosive impacts on nominal debt. Once they receive information about debt erosion, households update their beliefs about their own real net wealth and even change their consumption choices.
Topics:  Monetary Policy
Insights / Research BriefAug 15, 2023

The Long-term Effects of Inflation on Inflation Expectations

Fabio Braggion, Felix von Meyerinck, Nic Schaub, Michael Weber
German households living in areas with higher local inflation during the hyperinflation of the 1920s expect higher inflation today, suggesting that inflationary shocks have a long-lasting impact on attitudes toward inflation.
Topics:  Monetary Policy
Insights / Research BriefAug 01, 2023

Tell Me Something I Don’t Already Know: Learning in Low and High-Inflation Settings

Michael Weber, Bernardo Candia, Tiziano Ropele, Rodrigo Lluberas, Serafin Frache, Brent H. Meyer, Saten Kumar, Yuriy Gorodnichenko, Dimitris Georgarakos, Olivier Coibion, Geoff Kenny, Jorge Ponce
As inflation has recently risen in advanced economies, both households and firms have become more attentive and informed about inflation, leading them to respond less to information about inflation and monetary policy.
Topics:  Monetary Policy
Insights / Research BriefJul 20, 2023

Price Level and Inflation Dynamics in Heterogeneous Agent Economies

Greg Kaplan, Georgios Nikolakoudis, Giovanni L. Violante
This work offers new insights into the effects of persistent fiscal deficits on US inflation, revealing that targeted income redistribution during COVID increased short-term inflation significantly. The largest sustainable primary deficit is 4.6% of GDP, or 40% higher than current levels, dependent on how deficit spending is distributed.
Topics:  Financial Markets, Monetary Policy
Insights / Research BriefJun 30, 2023

Monetary Policy Transmission Through Online Banks

Samuel Earnest, Isil Erel, Jack Liebersohn, Constantine Yannelis
Monetary transmission is significantly larger for online banks; compared to brick-and-mortar banks, a 100-basis point increase in the federal funds rate leads to an approximately-30-basis-point larger increase in deposit rates offered by online banks.
Topics:  Financial Markets, Monetary Policy
Insights / Research BriefSep 23, 2022

Perceptions about Monetary Policy

Michael D. Bauer, Carolin Pflueger, Adi Sunderam
This paper takes a new approach based on forecaster-level data to estimate a perceived monetary policy rule month-by-month from 1985 until 2021. It shows that this perceived rule varies, that even sophisticated forecasters need to learn about the monetary policy rule, and implications for monetary policy and financial markets. The Federal Reserve’s monetary policy rule is perceived differently over the policy cycle, with easings perceived as quick and surprising, and tightenings perceived as gradual and data-dependent; these perceptions affect the perceived risk of long-term bonds, or the risk premium in long-term interest rates. Learning about the monetary policy rule can therefore shed light on “conundrum” episodes, when economically relevant long-term rates appear disconnected from monetary policy.
Topics:  Monetary Policy
Insights / Research BriefMar 17, 2022

What Do the Data Tell Us About Inflation Expectations?

Francesco D’Acunto, Ulrike Malmendier, Michael Weber
Recent research reveals that household inflation expectations are biased upwards, dispersed across individuals, and volatile over time, contrary to prevalent economic theory.
Topics:  Monetary Policy
Insights / Research BriefFeb 01, 2022

Liquidity, Liquidity Everywhere, not a Drop to Use: Why Flooding Banks with Central Bank Reserves May Not Expand Liquidity

Viral V. Acharya, Raghuram Rajan
Despite a significant expansion in central bank balance sheets, some markets like the US money market have experienced increasing interest rate volatility, including significant spikes in the repo rate, notably in September 2019 (see Copeland, Duffie and Yang (2021), Correa, Du, and Liao (2021), D’Avernas and Vanderweyer (2021), and Yang (2021)). This apparent disruption in money markets that depend intimately on the availability of liquidity seems puzzling when the cash and central bank reserves held by the US private sector at the end of 2019 were around 4 times their holdings before the Global Financial Crisis in 2007. Greater liquid holdings do not seem to have made markets for liquidity more immune to liquidity shocks. Indeed, markets were disrupted yet again in March 2020 at the onset of the COVID-19 pandemic and the banking system was found short in its ability to accommodate the demand for liquidity. In response, the Federal Reserve expanded its balance sheet yet more (see, for example, Kovner and Martin (2020)), buying financial assets from the private sector and placing large quantities of liquid reserves with it (or promising to do so). Where had all the prior liquidity gone?
Topics:  Monetary Policy