Pandemic-Era Monetary Policy Linked to Stronger Inflationary Effects
A recent study from Yunnan University suggests that the Federal Reserve's unconventional monetary policy (UMP) during the pandemic led to stronger inflationary effects compared to the financial crisis period.
The research, published in the Journal of International Commerce, Economics and Policy, used a time-varying parameter stochastic volatility vector autoregression (TVP-SV-VAR) model to analyze the primary transmission mechanism of monetary policy's inflationary effects.
The study found that amplified liquidity injections via the 'monetary policy-household income-consumption demand-inflation' mechanism contributed to greater inflationary pressures during the pandemic, driven by an array of relief and subsidy policies introduced at the time.
The researchers concluded that UMP appears suitable only for transient application during crises and warned that the U.S. will face heightened vulnerability to recurring inflation in the future due to the heightened stickiness of inflation expectations driven by the M2 surge.