Pandemic-Era Inflation Drivers and Global Spillovers

59 Pages Posted: 5 Dec 2023

See all articles by Julian di Giovanni

Julian di Giovanni

Federal Reserve Banks - Federal Reserve Bank of New York; Centre for Economic Policy Research (CEPR)

Sebnem Kalemli-Ozcan

University of Maryland

Alvaro Silva

University of Maryland

Muhammed Ali Yildirim

Harvard University - Harvard Kennedy School (HKS)

Multiple version iconThere are 3 versions of this paper

Date Written: 2023

Abstract

We estimate a multi-country multi-sector New Keynesian model to quantify the drivers of domestic inflation during 2020–2023 in several countries, including the United States. The model matches observed inflation together with sector-level prices and wages. We further measure the relative importance of different types of shocks on inflation across countries over time. The key mechanism, the international transmission of demand, supply and energy shocks through global linkages helps us to match the behavior of the USD/Euro exchange rate. The quantification exercise yields four key findings. First, negative supply shocks to factors of production, labor and intermediate inputs, initially sparked inflation in 2020–2021. Global supply chains and complementarities in production played an amplification role in this initial phase. Second, positive aggregate demand shocks, due to stimulative policies, widened demand-supply imbalances, amplifying inflation further during 2021–2022. Third, the reallocation of consumption between goods and service sectors, a relative sector-level demand shock, played a role in transmitting these imbalances across countries through the global trade and production network. Fourth, global energy shocks have differential impacts on the US relative to other countries’ inflation rates. Further, complementarities between energy and other inputs to production play a particularly important role in the quantitative impact of these shocks on inflation.

Keywords: inflation, international spillovers, global production network

JEL Classification: E200, E300, E600, F100, F400

Suggested Citation

di Giovanni, Julian and Kalemli-Ozcan, Sebnem and Silva, Alvaro and Yildirim, Muhammed Ali, Pandemic-Era Inflation Drivers and Global Spillovers (2023). CESifo Working Paper No. 10789, Available at SSRN: https://ssrn.com/abstract=4653675 or http://dx.doi.org/10.2139/ssrn.4653675

Julian Di Giovanni (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

HOME PAGE: http://julian.digiovanni.ca

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

HOME PAGE: http://julian.digiovanni.ca

Sebnem Kalemli-Ozcan

University of Maryland ( email )

College Park
College Park, MD 20742
United States

Alvaro Silva

University of Maryland ( email )

Muhammed Ali Yildirim

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States

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