What drives core inflation? The role of supply shocks

Marta Banbura, Elena Bobeica and Catalina Martínez Hernández

No 2875, Working Paper Series from European Central Bank

Abstract: Considering key lessons from the post-pandemic high inflation episode, we propose a framework to understand euro area core inflation which: (i) accounts for a rich set of drivers and (ii) identifies “new” shocks, associated to gas prices and to global supply chain bottlenecks. We propose a structural BVAR with a factor structure in the reduced-form residual, an outlier correction, and treatment of ragged edges. We find that supply shocks explain most of the inflation surge, while monetary policy shocks played a limited role. An adjusted core inflation rate, abstracting from shocks linked to energy or supply chain bottlenecks, was more stable but still increased to record highs. JEL Classification: E31, C32, C38

Keywords: Bayesian VAR; gas prices; inflation; supply chain bottlenecks; supply shocks (search for similar items in EconPapers)
Date: 2023-11
New Economics Papers: this item is included in nep-eec and nep-mon
Note: 810771
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (22)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20232875

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