Pandemic Preference Shocks and Inflation in a New Keynesian Model

William Craighead

Atlantic Economic Journal, 2022, vol. 50, issue 3, No 4, 133-146

Abstract: Abstract This paper examines two types of preference shocks, shocks to the disutility of working and to the demand for goods relative to services, in an otherwise standard New Keynesian model. Existing literature has primarily focused on productivity and monetary shocks as driving processes. The contribution of this paper is to construct model-based processes for both types of preference shocks using United States data over 1948–2022 from the Bureau of Economic Analysis and Bureau of Labor Statistics and investigate the resulting dynamics in the New Keynesian framework. Constructing historical processes for the shocks provides context for examining the shifts that occurred during the coronavirus pandemic. Both preference shocks show movements of unprecedented magnitude that coincide with the pandemic. In the model, the relative demand shock leads to opposite movements in inflation and labor between the two sectors, while the shock to labor disutility is stagflationary, with inflation rising and output decreasing. A pandemic-motivated experiment with simultaneous large shocks to both labor disutility and relative goods demand generates divergences between the sectors in inflation and labor, but higher inflation and reduced output overall. This demonstrates that preference shocks may be useful for understanding the pandemic-era economy and suggests that they deserve more attention from economists and policymakers.

Keywords: Labor supply; Relative demand; New Keynesian model; COVID-19; E10; E52 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s11293-022-09752-7 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
Working Paper: Pandemic Preference Shocks and Inflation in a New Keynesian Model (2022)
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:kap:atlecj:v:50:y:2022:i:3:d:10.1007_s11293-022-09752-7

Ordering information: This journal article can be ordered from
http://www.springer. ... cs/journal/11293/PS2

DOI: 10.1007/s11293-022-09752-7

Access Statistics for this article

Atlantic Economic Journal is currently edited by Kathleen S. Virgo

More articles in Atlantic Economic Journal from Springer, International Atlantic Economic Society Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().