The Twin Supply Shocks to Canada's Post-Pandemic\\Inflation and Monetary Policy

Trevor Tombe and Yu (Sonja) Chen
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Yu (Sonja) Chen: University of Calgary

No 2022-03, Working Papers from Department of Economics, University of Calgary

Abstract: Canada's inflation rate rose from 3.1 percent in June 2021 to 8.1 percent one year later. Monetary policy is consequently tightening. We explore some causes and consequences of these developments. Using detailed price and quantity data, we separately identify demand- from supply-driven inflation. We find two-thirds of Canada's accelerating inflation since Q1 2020 is supply-driven, which complicates monetary policy. Another supply shock --- large increases in bank reserves --- may complicate it further. We estimate that ample reserves and rising interest rates may cause large financial losses for the Bank of Canada. This creates novel reputational and communications challenges for the Bank and highlights underappreciated connections between monetary and fiscal policy. These twin supply shocks --- to consumer products and overnight balances --- are important aspects of Canada's recent inflation and monetary policy experiences.

Keywords: inflation; supply shocks; monetary policy; Bank of Canada; interest on reserves (search for similar items in EconPapers)
JEL-codes: E31 E4 E58 E65 (search for similar items in EconPapers)
Date: 2022-09-01
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Persistent link: https://EconPapers.repec.org/RePEc:clg:wpaper:2022-03

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