A Note on Temporary Supply Shocks with Aggregate Demand Inertia

Ricardo Caballero () and Alp Simsek

No 16814, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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; Backward guidance; Covid-19 (search for similar items in EconPapers)
JEL-codes: E21 E32 E43 E44 E52 G12 (search for similar items in EconPapers)
Date: 2022-06
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP16814 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

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)
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:cpr:ceprdp:16814

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP16814

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().