We examine how a more hawkish policy stance – defined as an above-median long-run inflation semi-elasticity of the policy rate – affects economic growth in 37 inflation-targeting (IT) countries. To this end, we estimate time-varying, bias-corrected forward-looking Taylor rules for all IT countries for which the data permit such estimation. Our results point to sizable growth effects, exceeding 0.8% annually, for countries with a more hawkish policy stance. This suggests that the growth benefits reported in the previous literature on inflation targeting are primarily driven by a small subset of countries that react more forcefully to inflation.

After a period of stable prices in advanced economies, inflation surged in 2022, largely driven by substantial increases in international food and energy prices. Using electronic payments data to estimate a demand system, we derive expenditure and price elasticities and evaluate the welfare effects of these relative price changes for Portuguese consumers. Our results indicate an average welfare loss of approximately 10% of total expenditure, disproportionately affecting lower-spending consumers. Furthermore, we observe that lower-expenditure consumers generally have larger price elasticities than their higher-spending counterparts. These results reinforce the evidence of the unequal welfare costs of inflation on consumers.

Macroeconomic models often have multiple equilibria. Nonetheless, a popular view on inflation targeting posits that this policy helps to coordinate agents’ expectations and actions. This paper provides a rationalization for this notion. I consider an infinitely repeated game, built on the Barro-Gordon model, in which the central bank incurs a fixed penalty whenever the actual inflation rate differs from the announced target and study how changes in the penalty impact its equilibria. I conclude that, in consonance with the aforementioned view, an inflation-targeting policy lessens the problem of equilibrium multiplicity. However, by itself, it is unlikely to achieve uniqueness.

In expectations-driven liquidity traps (LTs), a higher inflation target is associated with lower inflation and consumption. As a result, introducing the possibility of expectations-driven LTs to an otherwise standard model lowers the optimal inflation target. Using a calibrated New Keynesian model with an effective lower bound (ELB) constraint on nominal interest rates, we find that even a very small probability of falling into an expectations-driven LT lowers the optimal inflation target nontrivially. Our analysis provides a novel reason to be cautious about the argument that central banks should raise their inflation targets in light of a higher likelihood of hitting the ELB.

This paper quantitatively examines the effect of globalization on the natural rate of interest in developed economies, including Japan, the US, and the euro area. By incorporating into the model the variables that capture global economic and financial trends, such as demand and supply of safe assets and cross-border spillovers, with a smooth-transition framework, we account for the existence of nonlinear regime change of their coefficients, driven by globalization. Our findings indicate that along with the progress of globalization, (i) the impact of global factors rapidly increased around 2000 and (ii) the commonly observed decline in the natural rate of interest can be largely attributed to these global factors. These findings underscore the importance of incorporating global factors such as demand and supply of safe assets and global spillovers, with their increasing impact, alongside domestic factors such as productivity and demographics, when investigating developments in the natural rate of interest.

A “two-regime” view of there being a strong positive relationship between money growth and inflation in high-inflation episodes and little relationship occurring between them otherwise has been restated of late. Using the P-star model, and Divisia money aggregates, we demonstrate money having explanatory power across US inflation’s conditional distribution over a near-60-year sample period. We find the price gap—the difference between the observed and the equilibrium price level—to be significant and of the expected sign, both when outliers are down-weighted and for most of the quantile range. While the impact of the price gap tends to be strongest when inflation is high, there is a significant monetary impulse to prices across the inflation distribution. Monetary transmission to prices occurs more strongly through the money market than the goods market. As well as providing evidence against the two-regime view, the novel quantitative approach to P-star estimation demonstrates the model’s versatility in showing money’s broadly-based influence on inflation.

Private currencies can facilitate intertemporal exchange under limited commitment but exhibit excessive volatility when backed by productive assets subject to news shocks. I develop a model where banks issue deposits backed by firms’ output as collateral, with deposits circulating as currency. Adverse news about firm productivity—even when socially uninformative—induces binding debt constraints and deposit volatility, creating liquidity shortages that depress economic activity. With household heterogeneity, deposits are priced at a premium in liquidity-constrained economies. Interest-bearing central bank money provides an additional policy tool beyond traditional money growth. The interest rate influences asset prices through an investment channel: banks hold interest-bearing reserves as insurance against productivity shocks. This enables welfare-improving policies requiring positive inflation and nominal interest rates—departing from the Friedman rule. Calibrating the model to the US economy, I find that interest-bearing money generates a welfare gain of 2.54%, with the welfare cost of departing from the Friedman rule being roughly an order of magnitude smaller than the cost of operating with a suboptimal transfer. As an extension, I examine private information about consumer preferences, showing that illiquid bonds become essential for achieving efficiency. Cash-in-advance constraints on deposits can improve welfare by preventing destabilizing arbitrage, enabling coexistence of government and private currencies.