Fiscal Stimulus with Supply Constraints

Luca Fornaro

No 1458, Working Papers from Barcelona School of Economics

Abstract: This paper provides a framework to study the macroeconomic implications of supply constraints. Supply constraints hamper ï¬ rms' ability to scale up production in response to surges in demand, disconnect prices from wages, and create non-linearities and instability in the aggregate Phillips curve. I use the model to show that binding supply constraints amplify the rise in inflation caused by a ï¬ scal stimulus. This happens when the stimulus is large but transitory, when supply disruptions create shortages of intermediate inputs, and when public expenditure targets a few sectors of the economy. A persistent ï¬ scal stimulus, instead, may boost ï¬ rms' investment and productivity growth in the medium run, while having only a transitory impact on inflation.

Keywords: investment; fiscal multiplier; productivity; fiscal stimulus; inflation; supply constraints; multi-sector economy; convex supply curves; non-linear Phillips curve (search for similar items in EconPapers)
JEL-codes: E22 E31 E62 O31 O42 (search for similar items in EconPapers)
Date: 2024-09
References: View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Fiscal Stimulus with Supply Constraints (2024)
Working Paper: Fiscal Stimulus with Supply Constraints (2024)
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