Supply-side sources of inflation: evidence from OECD countries

Prakash Loungani and Phillip Swagel

No 515, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We evaluate the merits of the \"supply-side\" view under which inflation results from sectoral shocks, and compare it with the \"classical\" view in which inflation results from aggregate factors such as variations in money growth. Using a panel VAR methodology applied to data for 13 GECD countries, we find support for a multi-shock view of inflation: supply-side shocks are statistically significant determinants of inflation, even after taking into account aggregate demand factors. While oil prices are the dominant supply-side influence, other measures such as the skewness of relative price changes are important as well. At short horizons, an innovation to skewness leads to an increase in inflation of 0.5 percentage points. As suggested by the classical view, money growth plays an increasingly important role as the time horizon lengthens.

Keywords: Supply-side economics; Inflation (Finance); Organisation for Economic Co-operation and Development (search for similar items in EconPapers)
Date: 1995
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Citations: View citations in EconPapers (10)

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