Working Paper

Not All Inflation Is the Same: State-Dependent Transmission of Monetary Policy

Abstract: We show that the underlying source of inflation impacts financial market perceptions of the persistence of monetary policy tightening. Investors expect policy tightening to be more persistent inflation is driven by demand factors. During supply-driven episodes, however, investors perceive tightening as less persistent and less effective at producing a disinflation. These results point to a state-dependent financial market response to monetary policy: credibility, and therefore financial-market transmission, depends on what kind of inflation the central bank is perceived to be fighting.

JEL Classification: E43; E52; E58;

https://doi.org/10.24148/wp2025-28

Bibliographic Information

Provider: Federal Reserve Bank of San Francisco

Part of Series: Working Paper Series

Publication Date: 2024-11-24

Number: 2025

Note: PDF date: November 18, 2025.