We propose and test a new explanation for the rise and fall of the Great Inflation, a defining event in macroeconomics. We argue that its rise was due to the imposition of binding deposit rate ceilings under the law known as Regulation Q, and that its fall was due to the removal of these ceilings once the law was repealed. Deposits were the dominant form of saving at the time, hence Regulation Q suppressed the return to saving. This drove up aggregate demand, which pushed up inflation and further lowered the real return to saving, setting off an inflation spiral. The repeal of Regulation Q broke the spiral by sending deposit rates sharply higher. We document that the rise and fall of the Great Inflation lines up closely with the imposition and repeal of Regulation Q and the enormous changes in deposit rates and quantities it produced. We further test this explanation in the cross section using detailed data on local deposit markets and inflation. By exploiting four different sources of geographic variation, we show that the degree to which Regulation Q was binding has a large impact on local inflation, consistent with the hypothesis that Regulation Q explains the observed variation in aggregate inflation. We conclude that in the presence of financial frictions the Fed may be unable to control inflation regardless of its policy rule.

Using cross-country holdings, we estimate a demand system for financial assets across 36 countries. Based on the estimated demand system and market clearing, we decompose exchange rates, long-term yields, and equity prices into three sources of variation: macro variables, policy variables (i.e., short-term rates, debt quantities, and foreign exchange reserves), and latent demand. The former two account for 58 percent of the variation in exchange rates, and the remaining variation due to latent demand is geographically concentrated. Policy variables account for 66 percent of the variation in long-term yields. Macro variables account for 63 percent of the variation in equity prices.

How do changes in aggregate volatility alter the impulse response of output to monetary policy? To analyze this question, I study whether individual prices in Producer Price Index micro data are more likely to move in the same direction when aggregate volatility is high, which would increase aggregate price flexibility and reduce the effectiveness of monetary policy. Taking advantage of plausibly exogenous oil price volatility shocks and heterogeneity in oil usage across industries, I find that price changes are more dispersed, implying that prices are less likely to move in the same direction when aggregate volatility is high. This contrasts with findings in the literature about idiosyncratic volatility. I use a state-dependent pricing model to interpret my findings. Random menu costs are necessary for the model to match the positive empirical relationship between oil price volatility and price change dispersion. This is the case because random menu costs reduce the extent to which firms with prices far from their optimum all act in a coordinated fashion when volatility increases. The model implies that increases in aggregate volatility do not substantially reduce the ability of monetary policy to stimulate output.

In this paper, we study the effect of a credit supply shock on the distribution of wages within and between firms. We construct a novel dataset combining administrative linked employer-employee data with information on firms' preexisting bank relationships in the credit market. We use the introduction of negative monetary policy rates in the euro area as a source of variation in banks' credit supply to firms in Germany. We find that this credit supply shock leads to higher within-firm wage inequality at more affected employers. At the same time, we find a reduction in between-firm wage inequality due to relatively higher average wages among initially lower-paying employers. Our results suggest that monetary policy can have important distributional consequences through affecting credit supply and firm pay heterogeneity.