Global Drivers of Inflation and Monetary Policy
Paper Session
Sunday, Jan. 3, 2027 2:30 PM - 4:30 PM (EST)
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Chairs:
Kristin Forbes, Massachusetts Institute of Technology - Ben Bernanke, Brookings Institution
Heaven or Earth?: The Evolving Role of Global Shocks for Domestic Monetary Policy
Abstract
Business cycles are increasingly driven by global shocks, rather than the domestic demand shocks prominent in earlier decades, posing challenges for central banks seeking to meet domestic mandates and communicate their policy decisions. This paper analyzes the evolving influence and characteristics of global and domestic shocks in advanced economies from 1970-2024 using a new FAVAR model that decomposes movements in interest rates, inflation, and output growth into four global shocks (demand, supply, oil, and monetary policy) and three domestic shocks (demand, supply, and monetary policy). We find that the role of global shocks has increased sharply over time and that their characteristics differ from those of domestic shocks across multiple dimensions. Compared to domestic shocks, global shocks have a larger supply component, higher variance, more persistent effects on inflation, and are more asymmetric (contributing more to tightening than to easing phases of monetary policy). As global supply shocks have become more prominent, central banks have also been less willing to “look through” their effects on inflation than for comparable domestic shocks. The distinct characteristics and rising influence of global shocks—particularly global supply shocks—have significant implications for modeling monetary policy and designing central bank frameworks.Seemingly Anchored Inflation Expectations
Abstract
Empirical evidence suggestive of better anchoring of inflation expectations—such as the declining sensitivity to inflation surprises over time or around the adoption of inflation targeting—is commonly attributed to the influence of explicit or implicit inflation targets. We show, however, that this evidence is consistent with a model of experience-based learning in which individuals learn solely from their life-time history of realized inflation, without anchoring their expectations to an announced inflation target. In this model, the prolonged experience of low short-run inflation persistence in the pre-COVID decades renders long-run expectations sensitivity to inflation surprises, matching the patterns observed in empirical anchoring tests and the fact that the decline in surprise sensitivity since the 1980s is strongest among younger individuals. The memory of low inflation persistence experiences also explains why long-run inflation expectations remained stable in the face of the post-COVID inflation surge. At the same time, simulations indicate that the sensitivity of long-run expectations to inflation surprises would rise sharply if individuals were to experience another sustained episode of highly persistent inflation. Overall, long-run inflation expectations may be less firmly anchored than commonly believed.The Price Impact of Canadian Retaliatory Tariffs
Abstract
Canada’s March 2025 retaliatory tariffs on U.S. imports provide a quasi-natural experiment on retail price pass-through. We combine daily product-level posted prices from seven major Canadian retailers (October 2024 to February 2026) with product level tariff exposure to estimate pass-through in a difference-in-differences framework. Tariffed goods experience a gradual price increase of 6% by mid-June, with few spillovers to untariffed products. After most tariffs are removed in September, price effects unwind almost entirely by the end of 2025. Retailers change the frequency of price increases and decreases to adjust prices with tariffs on and off. Pass-through shifts around major trade-policy news and is substantially larger when products are labeled “Tariffed” at the point of sale, consistent with expectations and information shaping pricingDiscussant(s)
Narayana Kocherlakota
,
University of Rochester
Egon Zakrajsek
,
Federal Reserve Bank of Boston
Stephanie Schmitt-Grohe
,
Columbia University
Annie Lee
,
Johns Hopkins University
JEL Classifications
- E3 - Prices, Business Fluctuations, and Cycles
- E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit