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: We propose a framework to identify a rich set of structural drivers of inflation in order to understand the role of the multiple and concomitant sources of the post-pandemic inflation surge. We specify a medium-sized structural Bayesian VAR on a comprehensive set of variables for the euro area economy. We analyse in particular various types of supply shocks, some of which were not considered relevant before the pandemic, notably global supply chain shocks and gas price shocks. The residuals of the VAR are assumed to admit a factor structure and the shocks are identified via zero and sign restrictions on factor loadings. The framework can deal with ragged-edge data and extreme observations. Shocks linked to global supply chains and to gas prices have exhibited a much larger influence than in the past. Overall, supply shocks can explain the bulk of the post-pandemic inflation surge, also for core inflation. Being able to gauge the impact of such shocks is useful for policy making. We show that a counterfactual core inflation measure net of energy and global supply chain shocks has been more stable after the pandemic. JEL Classification: E31, C32, C38, Q54

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 (8)

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

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