The scars of supply shocks: Implications for monetary policy

Martin Wolf and Luca Fornaro

No 1214, Working Papers from Barcelona School of Economics

Abstract: We study the effects of supply disruptions – for instance due to energy price shocks or the emergence of a pandemic – in an economy with Keynesian unemployment and endogenous productivity growth. By temporarily disrupting investment, negative supply shocks generate permanent output losses – or scarring effects. By inducing a negative wealth effect, scarring effects depress aggregate demand, which may even fall below the exogenous fall in supply. However, that scarring effects depress aggregate demand does not necessarily translate into low rates of ination. On the contrary, scarring effects may reinforce and prolong the inflationary impact of supply disruptions. A contractionary monetary policy response may end up deepening scarring effects and increasing inflation in the medium run. A successful disinflation may require a policy mix of monetary tightening and fiscal interventions aiming at supporting business investment and the economy's productive capacity.

Keywords: investment; endogenous growth; inflation; COVID-19; energy shocks; hysteresis (search for similar items in EconPapers)
JEL-codes: E22 E31 E32 E52 E62 O42 (search for similar items in EconPapers)
Date: 2020-11
New Economics Papers: this item is included in nep-mac and nep-pke
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

Downloads: (external link)
https://bw.bse.eu/wp-content/uploads/2020/11/1214-file.pdf (application/pdf)

Related works:
Journal Article: The scars of supply shocks: Implications for monetary policy (2023)
Working Paper: The scars of supply shocks: Implications for monetary policy (2023)
Working Paper: The Scars of Supply Shocks: Implications for Monetary Policy (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bge:wpaper:1214

Access Statistics for this paper

More papers in Working Papers from Barcelona School of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Bruno Guallar ().