Drivers of inflationary shocks and spillovers between Europe and the United States

Javier Sánchez García, Emilio Galdeano Gómez and Salvador Cruz Rambaud

Socio-Economic Planning Sciences, 2024, vol. 95, issue C

Abstract: This paper builds a structural econometric model to measure the impact on inflation of three shocks: a shock of disequilibrium in the energy markets, a money growth shock, and a global stochastic shock, which covers factors such as inflationary expectations and uncertainty. It is found that for the economies of Europe and the United States, the current inflationary period is dominated by the global component closely followed by energy markets in the short term and by monetary growth in the medium term. The dynamics of the model further show that the recent exponential inflationary surge of 2021 onward is mainly headed by other factors rather than energy markets or money growth, such as expectations or uncertainty. Further analysis of the spillover effects between the inflation of Europe and the United States based on endogeneity-robust econometric estimations shows that this relationship is unidirectional from the USA to Europe. In essence, this work shows that a coordinated strategy between fiscal and monetary policies is the best response to recent inflationary shocks.

Keywords: Inflation; Money growth; Energy markets; Structural Vector Autoregression (VAR); Supply chains; Macro-financial dynamics (search for similar items in EconPapers)
JEL-codes: C32 E31 E51 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:soceps:v:95:y:2024:i:c:s0038012124001769

DOI: 10.1016/j.seps.2024.101977

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