Working Paper: NBER ID: w31520
Authors: Richard H. Clarida
Abstract: This paper assesses the proximate causes of the post pandemic surge in US inflation, the Federal Reserve's real time reaction to and interpretation of incoming data in 2021, and the pivot to raising rates and shrinking the balance sheet that commenced in 2022 and continues in 2023. Particular attention is devoted to the role, if any, that Fed's August 2020 revisions to its monetary policy framework may have played in delaying lift - off relative to counterfactuals informed by simple policy rules, including a framework - consistent "shortfalls" policy rule featured in its semi - annual Monetary Policy Reports.
Keywords: No keywords provided
JEL Codes: E30; E4; E5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Federal Reserve's aggressive monetary policy response (E52) | post-pandemic inflation surge (E31) |
| cutting of interest rates to zero (E52) | surge in nominal aggregate demand (E19) |
| implementation of quantitative easing (E52) | surge in nominal aggregate demand (E19) |
| rapid increase in demand due to expansive fiscal measures (E62) | inflationary pressures (E31) |
| Fed's failure to accurately assess aggregate supply conditions (E00) | prolonged accommodative monetary policy (E52) |
| prolonged accommodative monetary policy (E52) | exacerbated inflation (E31) |
| Fed's pivot to a hawkish stance in 2022 (E52) | counteract inflationary environment (E31) |