Demand vs. Supply Decomposition of Inflation: Cross-Country Evidence with Applications
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Summary:
What are the contributions of demand and supply factors to inflation? To address this question, we follow Shapiro (2022) and construct quarterly demand-driven and supply-driven inflation series for 32 countries utilizing sectoral Personal Consumption Expenditures (PCE) data. We highlight global trends and country-specific differences in inflation decompositions during critical periods such as the great financial crisis of 2008 and the recent inflation surge since 2021. Validating our inflation series, we find that supply-driven inflation is more reactive to oil shocks and supply chain pressures, while demand-driven inflation displays a more pronounced response to monetary policy shocks. Our results also suggest a steeper Phillips curve when inflation is demand-driven, holding significant implications for effective policy design.
Series:
Working Paper No. 2023/205
Subject:
Economic theory Inflation Oil prices Oil production Output gap Prices Production Supply shocks
Frequency:
regular
English
Publication Date:
October 17, 2023
ISBN/ISSN:
9798400257339/1018-5941
Stock No:
WPIEA2023205
Format:
Paper
Pages:
43
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