Research on the Time-Varying Inflationary Effects of the Federal Reserve’s Unconventional Monetary Policy: An Empirical Test Based on the TVP-SV-VAR Model

Based on a comparative analysis of policy content and policy environments during two crisis periods, this paper argues that the unconventional monetary policy (UMP) implemented by the Federal Reserve (Fed) during the pandemic generated stronger inflationary effects compared to the financial crisis period. Empirical tests using a time-varying parameter stochastic volatility vector autoregression (TVP-SV-VAR) model on the primary transmission mechanism of monetary policy’s inflationary effects provide data-driven validation supporting this inference. Specifically, under the pandemic’s unique conditions, amplified liquidity injections via the “monetary policy–household income–consumption demand–inflation” mechanism contributed to greater inflationary pressures. The critical factor enabling effective monetary penetration and subsequent robust demand stimulation was the array of relief and subsidy policies introduced during the pandemic. Furthermore, this inflationary episode exhibited pronounced self-reinforcing characteristics. The heightened stickiness of inflation expectations driven by the M2 surge implies that the U.S. will face heightened vulnerability to recurring inflation in the future. Absorbing excess liquidity through economic growth will inevitably require an extended period, particularly amid the nation’s growing shift toward isolationism. As a unique product of extraordinary times, UMP appears suitable only for transient application during crises. How to abandon reliance on and abuse of UMP in the future remains a critical challenge confronting the Fed.