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Discussion Paper
Pass-Through of Wages and Import Prices Has Increased in the Post-COVID Period
Annual CPI inflation reached 9.1 percent in June 2022, the highest reading since November 1981. The broad-based nature of the recent inflation readings has increased concerns that inflation may run above the Federal Reserve’s target for a longer period than anticipated. In this post we use detailed industry-level data to examine two prominent cost-push-based explanations for high inflation: rising import prices and higher labor costs. We find that the pass-through of wages and input prices to the U.S. Producer Price Index has grown during the pandemic. Both the large changes in these costs ...
Working Paper
Distributional Effects of Payment Card Pricing and Merchant Cost Pass-through in the United States and Canada
Using data from the United States and Canada, we quantify consumers’ net pecuniary cost of using cash, credit cards, and debit cards for purchases across income cohorts. The net cost includes fees paid to financial institutions, rewards received from credit or debit card issuers, and the higher retail prices passed on to consumers to cover merchants’ payment processing costs. Even though credit cards are more expensive for merchants to accept compared with other payment methods, merchants typically do not differentiate prices at checkout but instead pass through their costs to all ...
Working Paper
Heterogeneity in the Pass-Through from Oil to Gasoline Prices: A New Instrument for Estimating the Price Elasticity of Gasoline Demand
We propose a new instrument for estimating the price elasticity of gasoline demand that exploits systematic differences across U.S. states in the pass-through of oil price shocks to retail gasoline prices. We show that these differences are primarily driven by the cost of producing and distributing gasoline, which varies with states’ access to oil and gasoline transportation infrastructure, refinery technology and environmental regulations, creating cross-sectional gasoline price shocks in response to an aggregate oil price shock. Time-varying estimates do not support the view that the ...
Working Paper
How Do Housing Markets Affect Local Consumer Prices? – Evidence from U.S. Cities
Analyzing city-level retail price data for a variety of consumer products, we find that house price changes lead local consumer price changes, but not vice versa. The transmission of the house price changes differs substantially across locations and products. It also hinges on the nature of housing market shocks; housing supply shocks propagate through the cost-push channel via local cost and markup effects, while housing demand shocks transmit through conventional wealth and collateral effects. Our findings suggest that housing may exert greater impacts on the local cost-of-living and ...
Discussion Paper
The Federal Reserve’s Two Key Rates: Similar but Not the Same?
Since the global financial crisis, the Federal Reserve has relied on two main rates to implement monetary policy—the rate paid on reserve balances (IORB rate) and the rate offered at the overnight reverse repo facility (ON RRP rate). In this post, we explore how these tools steer the federal funds rate within the Federal Reserve’s target range and how effective they have been at supporting rate control.
Working Paper
Oil Price Pass-Through into Core Inflation
We estimate the oil price pass-through into consumer prices both in the US and in the euro area. In particular, we disentangle the specific effect that an oil price change might have on each disaggregate price, from the effect on all prices that an oil price change might have since it affects the whole economy. To do so, we first estimate a Dynamic Factor Model on a panel of disaggregate price indicators, and then we use VAR techniques to estimate the pass-through. Our results show that the oil price passes through core inflation only via its effect on the whole economy. This pass-through is ...
Discussion Paper
Monetary Policy and Money Market Funds in Europe
As shown in a past Liberty Street Economics post, in the United States, the yields of money market fund (MMF) shares respond to changes in monetary policy rates much more than the rates of bank deposits; in other words, the MMF beta is much higher than the deposit beta. Consistent with this, the size of the U.S. MMF industry fluctuates over the interest rate cycle, expanding during times of monetary policy tightening. In this post, we show that the relationship between the policy rates of the European Central Bank (ECB) and the size of European MMFs investing in euro-denominated securities is ...