We study the effect of time-varying disagreement of professional forecasters on the transmission of monetary policy in Korea, which has transitioned from an emerging to an advanced economy. We find that high levels of disagreement interfere with the transmission of monetary policy and, hence, weaken monetary policy effects. However, under low levels of disagreement, a monetary policy shock elicits textbook-like responses of inflation, expected inflation, and real activity. The findings are consistent with the view that disagreement affects the role of the signaling channel of monetary transmission relative to the conventional transmission channel. We also show that the dependance of the transmission on the level of disagreement remains intact even after controlling for time-varying monetary policy uncertainty and considering the shifts in the Bank of Korea’s inflation target type.

This study investigates the relationship between consumers’ fiscal and inflation expectations using granular survey data. After applying various methods to reduce endogeneity bias and providing several robustness checks, we show that consumers’ fiscal expectations positively affect their inflation expectations. Moreover, we demonstrate that this link is nonlinear and becomes stronger with the deterioration of the fiscal stance, particularly in response to increases in consumer expectations regarding future fiscal expansions. This novel empirical finding is especially relevant from both fiscal and monetary policy perspectives.

We provide new evidence on U.S. monetary policy spillovers to Australia using an integrated time–frequency connectedness framework. Spillovers primarily transmit through the interest rate (policy rate) channel, followed by the asset price (with the consumer discretionary sector as the main conduit) channel and the exchange rate channel. Spillovers are highly time-varying, peaking at the onset of COVID-19 and again during the global financial crisis and the European sovereign debt crisis. Linking these spillovers to the real economy, we show that an identified U.S. tightening is followed by a tightening in Australia’s monetary policy stance and generates contractionary and disinflationary effects on Australian output and inflation, consistent with transmission via imported financial conditions and the domestic policy reaction. Finally, we show that ignoring spillovers yields a price puzzle under recursive VAR identification, while using spillover-based surprises as external instruments removes the puzzle and recovers theory-consistent responses.

This paper studies the transition to high inflation during the COVID-19 pandemic, using a behavioral version of the New Keynesian model, which replaces the conventional assumption of rational expectations with subjective and heterogeneous expectations. Different shares of agents in the economy form expectations based on alternative views regarding future economic variables: (1) a share of agents forecasts that inflation and output will rapidly revert to steady state; (2) another share forms forecasts based on a model resembling the MSV solution under rational expectations; (3) a third share of agents uses an under-specified model that captures trend-following, adaptive, or extrapolative behavior. Agents learn over time the parameters of their perceived model and they can also shift across different views based on past forecasting performance. The macroeconomic model is estimated using Bayesian methods to fit realized macroeconomic variables and data on expectations from surveys. The results document an additional channel that operates through switches in agents’ perceptions and amplifies the impact of the original inflationary shocks. In response to rising inflation after COVID, agents begin shifting from the mean reversion model to the trend-following specification (with a belief about perceived inflation persistence that is simultaneously revised upward). Consequently, the impact of inflationary shocks is magnified and the effects of monetary policy attenuated.

This paper examines optimal fiscal and regulatory policies within a New Keynesian (NK) framework that incorporates household fairness concerns regarding firm pricing behavior. Households derive utility not only from consumption and leisure but also from their perception of price fairness, which is influenced by biased beliefs about the price markup. These misperceptions reduce the effective price markup, as firms adjust pricing to avoid a demand backlash. The planner faces a trade-off between addressing monopolistic distortions, traditionally managed through the labor subsidy, and mitigating fairness concerns amplified by behavioral biases as spending increases. When biases are mild, the optimal fiscal policy remains the labor subsidy, though smaller than in the standard NK model. As fairness dynamics strengthen, the optimal policy shifts to a labor tax aimed at alleviating perceived unfair pricing, albeit with additional welfare losses. Capping the price markup can replicate the labor subsidy under moderate biases but loses effectiveness as fairness intensifies. These findings provide theoretical insights into how fairness-related behavioral distortions shape policymakers’ trade-offs and inform the design of optimal fiscal and regulatory policies.

The 1970s oil shocks sparked high and persistent inflation in advanced economies, also tied to the collapse of the Bretton Woods international monetary system in 1971 that left monetary policy without a stable institutional reference framework. Only in the following decades did a new monetary regime emerge, centered on inflation targeting schemes adopted by independent central banks. Beyond this, other factors affected inflation persistence, namely wage-price spirals rooted in automatic wage adjustment mechanisms, and fiscal policies financed thanks to the regulatory requirement for the central bank to purchase unsold public debt. This article gives a concise analysis of the rationale and provides descriptive evidence of the role these institutional aspects played in the 1970s, suggesting how their evolution has reduced the likelihood of 1970s-style inflationary episodes today. A structural VAR-based counterfactual exercise confirms that absent wage and fiscal pressures inflation persistence would have been significantly lower.

We propose a novel approach to classifying inflation-targeting (IT) economies using fractionally integrated processes. Motivated by the rising prevalence and diversity of IT, we leverage variation in the persistence of inflation rates to identify four de facto strategies, or “shades” of IT. Moving from negative orders of fractional integration, indicating anti-persistent behaviour, to more persistent long-memory processes, often associated with less credible policy frameworks, we classify countries into average, strict, flexible, and uncommitted IT. This framework sheds light on differences between declarative and actual strategies across 36 advanced and emerging economies. Most countries fall into the flexible IT category, though extreme cases, including uncommitted IT, occur quite frequently. Furthermore, we link our classification to institutional features of national frameworks using ordinal probit models. The results suggest differences across categories are related to variations in the maturity and stability of IT frameworks, with weaker connections to central bank independence and transparency.

Using US quarterly data (1967–2023), including inflation’s post-pandemic surge and decline alongside monetary policies characterized by quantitative easing before refocusing on the 2% target, we utilize traditional and novel econometric tools to assess the stability of key macroeconomic variables’ responses to monetary shocks. Our findings confirm the relevance of a broad Divisia aggregate in understanding monetary policy transmission and highlight its empirical importance in explaining output and price dynamics across decades. Time-varying impulse response functions (IRFs) reveal consistent and puzzle-free price responses to Divisia-based monetary shocks throughout the sample, aligning with theory. Time-varying IRFs indicate that pandemic-related outliers in GDP (2020Q2) do not disrupt results. In contrast, Fed Funds rate or shadow policy interest rate shocks often yield puzzling outcomes across earlier and extended periods.

I investigate the welfare maximizing steady-state inflation rate in a heterogeneous-agent New Keynesian model with Downward Nominal Wage Rigidity (DNWR). After matching the annual wage change distribution in the U.S., I demonstrate that DNWR has a significant impact on the economy, particularly when the inflation target is set low. The optimal inflation rate is estimated to be as high as 8.8%, and increasing the inflation target to the optimal level yields a welfare gain of nearly 3.50%. While the results exhibit sensitivity to parameterization, a broad range of calibrations indicates that the optimal inflation rate is consistently above 3%.

This paper adds to the literature on global inflation synchronization by distinguishing the traded and non-traded content of the consumption basket. Using a novel database of monthly CPI series of 40 countries from 2000, a dynamic factor model with stochastic volatility decomposes inflation into global, income-group, and idiosyncratic components. While synchronization has historically been prominent in tradable goods inflation, findings also reveal an increasing synchronization in non-tradable inflation. Second, I use a time-varying parameter vector autoregressive model to investigate the potential spillover effect. The results provide evidence of spillover from tradable to non-tradable inflation, while the reverse is mainly muted over the sample. Finally, results from local projections indicate that a tightening of US monetary policy causes a significant decline in global headline inflation, which is primarily driven by the heightened sensitivity of tradable goods.

We study how consumer preferences affect the transmission of microeconomic price shocks to consumer price index (CPI) inflation. These preferences give rise to complementarities and substitutions between goods, generating demand-driven cross-price dependencies that either amplify or mitigate the impact of price shocks. Our results demonstrate that while both effects are present, positive spillovers due to complementarities dominate. The magnitude of these cross-price effects is significant, demonstrating their importance in shaping CPI inflation dynamics. Most importantly, demand-driven price linkages decisively shape the impact of producer prices on CPI inflation. These findings underscore the need to take into account demand-driven price dependencies when assessing the impact of price shocks on CPI inflation, rather than relying solely on supply-related ones.

The 1920–1 recession did not transpire entirely without federal intervention, as commonly believed. Following lending by several Federal Reserve banks, the federally chartered War Finance Corporation (WFC) lent to support exports and shortly after the recession, it lent aggressively to assist banks in agricultural regions, as numerous bank suspensions resulted from the agricultural depression of the early 1920s. Bank suspensions decreased markedly in 1922 to the lowest annual total during the 1921–33 period. This article assesses the impact of WFC lending on bank suspensions, and to what extent the WFC's provision of liquidity helped to resolve the existing difficulties.

The pandemic caused expenditure shares to vary more than usual, leading to serious ramifications when combined with the fact that the expenditure shares used to calculate CPI inflation are 1-2 years old. This caused a potential bias in the measurement of inflation. We also look at the cost-of-living crisis and found that the lags in updating the expenditure shares for energy and food led to an underestimate of inflation in 2022. Inflation also has a large effect on the measurement of the public sector deficit. With a high debt-GDP ratio and high inflation, there was a substantial inflation tax.

We examine the role of fragmentation of information in explaining the dynamics of sectoral inflation. Using the quarterly survey of firms’ prices and costs in Japan, we first document two empirical facts: the sensitivity of sectoral inflation to changes in sectoral costs monotonically decreases with the dispersion of changes in (i) current costs and (ii) those in the past. A direct application of the dispersed information model can reconcile the fact (i) but fails to reconcile the fact (ii). We then extend the standard imperfect information model to construct a dynamic general equilibrium model that features fragmentation of information, wherein a finite number of groups of firms exist and firms in the same group share common idiosyncratic noises in their signals. Using this model, we find that the degree of fragmentation of information plays a crucial role in explaining these empirical facts.

In a series of academic publications, Edward Nelson has contended that from the 1950s until the late 1970s, UK policymakers failed to recognise the primacy of monetary policy in controlling inflation. He argues that the highwater mark of monetary policy neglect occurred in the 1970s. This thesis has been rejected by Duncan Needham who has explored several experiments with monetary policy from the late 1960s and challenged the assertion that the authorities neglected monetary policy during the 1970s. Drawing on evidence from the archives and other sources, this article documents how the UK authorities wrestled with monetary policy following the 1967 devaluation of sterling. Excessive broad money growth during the early 1970s was followed by the highest level of peacetime inflation by 1975. The article shows that despite the experiments with monetary policy, a nonmonetary view of inflation dominated the mindset of policymakers during the first half of the 1970s. In the second half of the 1970s there was a change in emphasis and monetary policy became more prominent in economic policymaking, particularly when money supply targets were introduced. Despite this, the nonmonetary view of inflation dominated the decision processes of policymakers during the 1970s.

We provide empirical evidence that the impact of quantitative easing (QE) programs on investment is weaker for countries with high-credit market regulations. We then extend a simple DSGE model with segmented financial markets to include credit regulation and examine its impact on the transmission of conventional and unconventional monetary policies. In our model, the government requires banks to hold a fraction of their assets in government debt. We show that the presence of such regulation can invert monetary transmission under QE policy: An expansionary QE program raises term premiums on corporate bonds and causes a contraction instead of an expansion in the economy. Such a perversion is absent under conventional policy. Further, in contrast to Carlstrom et al. (2017), we show that a simple Taylor rule welfare dominates a term premium peg under financial shocks, while the peg does better in the case of non-financial shocks.

Post the great financial crisis (GFC) of 2008–2009, there has been a surge in the macroeconomics literature on aggregate uncertainty. Although the recent literature has recognized the adverse real effects of global uncertainty shocks in emerging market economies (EMEs), the role of monetary policy in offsetting these adverse effects and their link with the exchange rates is not explored in the literature. We find that the currently followed interest rate rules (IRRs) under a flexible inflation-targeting regime are ineffective in stabilizing the domestic economy during periods of high global uncertainty in the EMEs. Using a small open economy new Keynesian DSGE model with Epstein–Zin preferences and second-moment demand shocks, we compare and propose alternate monetary policy rules that significantly reduce welfare losses. We find that the best monetary policy rule in terms of welfare depends on the nature of shock that is, first-moment or second-moment shock.

Brexit has cast a long shadow over the UK economy, with its impact masked by the COVID-19 pandemic and the crisis in Ukraine. Disentangling those effects is not straightforward, but that is the aim of the papers contained in this Special Issue. This Special Issue draws upon excellent contributions from some leading academic and policy-oriented researchers, all expert in the macroeconomic impacts of Brexit.

Since early 2021, food prices in Britain have increased by 30%. Using monthly microdata, researchers have found that frictions in the UK’s new trade relationship with the European Union (EU) play an important part in this inflation. The trade relationship is evolving, with further changes expected in 2024. This article establishes a framework for identifying trade-related inflation in close to real time. Using programming techniques, we collect daily prices of over 100,000 supermarket items, covering 80% of the UK grocery market. We identify 1,200 products from 12 countries with a protected designation of origin (PDO). This allows us to link price changes to individual EU economies. Addressing the predominance of EU PDOs, we employ a large language model to discern product origins from additional web-scraped data, thus broadening our analysis to cover over 67,000 products. Since August 2023, we find that prices for EU-originating food products have increased at a rate of 50% higher than domestically sourced products. This study presents a unique methodological approach to dissecting food sector inflation, which is well-positioned to be used in a policy setting, allowing us to assess the possible impact of impending nontariff barriers at the GB-EU border in 2024.

We analyze financial literacy regarding interest rates, inflation, and risk diversification in nine Eastern European countries based on survey data collected in the fall 2022. The percentage of individuals with an understanding of all three concepts is generally low but varies strongly among countries, from 13 percent in Romania to 47 percent in the Czech Republic. Financial illiteracy is particularly acute among those with primary or lower secondary education. Among the three concepts, inflation is what people know best in eight out of nine countries – a pattern which has emerged recently and is in contrast to other countries, where interest rate literacy is highest. Differences in lifetime inflation experience, in particular experience of high or hyperinflation, affect inflation literacy. Higher financial literacy is associated with a higher propensity to save and a lower propensity to be financially vulnerable in six out of nine countries.