The price puzzle revisited

ABSTRACT

This paper addresses the price puzzle that contractionary monetary policy increased inflation rates between 2000 and 2014 in the U.S. Previous studies tried to explain the puzzle, but we analyze it from a unique angle by tracing the credit generated by the Fed. Our findings show that the increased federal credit did not flow into business investment. Instead, U.S. financial institutions invested it in risky but profitable financial derivatives. The missing link between federal credit and business investment explains the price puzzle.

KEYWORDS:

• The price puzzle
• U. S. monetary policy
• discount window borrowing
• federal open market operation borrowing

JEL CLASSIFICATION:

• E44
• E51
• E52
• E58

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ We do not take log of FOMO borrowing because some of its observations are negative numbers.