A Note on Temporary Supply Shocks with Aggregate Demand Inertia

Ricardo Caballero () and Alp Simsek

No 9603, CESifo Working Paper Series from CESifo

Abstract: We study optimal monetary policy during temporary supply contractions when aggregate demand has inertia and the central bank is concerned about future constraints on expansionary policy. In this environment, it is optimal to run the economy hot until supply recovers. However, the policy does not remain loose throughout the low-supply phase. Overall, when the initial aggregate demand is low, the goal is to frontload the rate cuts to raise demand in anticipation of the recovery of supply. If inflation also has inertia, the central bank still overheats the economy during the low-supply phase but gradually cools it down over time.

Keywords: monetary policy; interest rates; temporary supply shocks; aggregate demand inertia; inflation; divine coincidence; policy frontloading; backward guidance; momentum; output and inflation gaps; the Phillips curve; Covid-19 (search for similar items in EconPapers)
JEL-codes: E21 E32 E43 E44 E52 G12 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Journal Article: A Note on Temporary Supply Shocks with Aggregate Demand Inertia (2023)
Working Paper: A Note on Temporary Supply Shocks with Aggregate Demand Inertia (2022)
Working Paper: A Note on Temporary Supply Shocks with Aggregate Demand Inertia (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_9603

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