Shocks, Frictions, and Policy Regimes: Understanding Inflation after the COVID-19 Pandemic

Taeyoung Doh and Choongryul Yang

No RWP 23-16, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: We set-up a two-sector New Keynesian model with input-output linkages and monetary fiscal policy interactions to study the post-COVID-19 inflation. We test alternative calibrations of the model based on the fit of aggregate inflation, using shock estimates obtained by fitting goods inflation. Our preferred model suggests that fiscal shocks not offset by monetary policy account for the initial inflation surge in the first half of 2021 while supply-side shocks have emerged as main drivers of inflation since then. Multiple factors (“supply-side disruption”, “expansionary policy”, and “sectoral reallocation shock”) played an important role at different phases of the recent inflationary episode.

Keywords: inflation persistence; COVID-19; sectoral reallocation; inflation feedback; production friction (search for similar items in EconPapers)
JEL-codes: E62 E63 (search for similar items in EconPapers)
Pages: 59
Date: 2023-12-22, Revised 2024-09-25
New Economics Papers: this item is included in nep-cba, nep-dge, nep-inv, nep-mon and nep-opm
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedkrw:97656

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DOI: 10.18651/RWP2023-16

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