Pandemic Preference Shocks and Inflation in a New Keynesian Model

William Craighead

No 2022-06, Working Papers from Department of Economics and Geosciences, US Air Force Academy

Abstract: This paper examines two types of preference shocks - shocks to the disutility of working and to demand for goods relative to services - in an otherwise standard New Keynesian model. Model-based processes for both shocks are constructed using postwar US data, and both show movements of unprecedented magnitude that coincide with the COVID-19 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.

Keywords: preference shocks; labor supply; relative demand; COVID-19 (search for similar items in EconPapers)
JEL-codes: E10 E52 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2022-08
New Economics Papers: this item is included in nep-dge and nep-mon
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https://www.usafa.edu/app/uploads/usafawp2022-06.pdf First version, 2022 (application/pdf)

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Journal Article: Pandemic Preference Shocks and Inflation in a New Keynesian Model (2022)
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