[[{“value”:”From a new and important paper by Xiwen Bai, Jesús Fernández-Villaverde, Yiliang Li, and Francesco Zanetti: Our analysis shows that supply chain disruptions generate stagflation, accompanied by an increase in spare capacity for producers. This higher spare capacity curtails the supply of goods to retailers and results in a surge in prices, leading to a
The post One reason why the disinflation proved so manageable appeared first on Marginal REVOLUTION.”}]]
From a new and important paper by Xiwen Bai, Jesús Fernández-Villaverde, Yiliang Li, and Francesco Zanetti:
Our analysis shows that supply chain disruptions generate stagflation, accompanied by an increase in spare capacity for producers. This higher spare capacity curtails the supply of goods to retailers and results in a surge in prices, leading to a tighter retail market. We show that, in this situation, prices become highly sensitive to changes in demand, while output remains relatively inelastic. In other words, disruptions to the supply chain enhance the effectiveness of contractionary monetary policy in taming inflation while reducing the sensitivity of output to the policy. Our results reinforce the general findings on the state-dependence of the efficacy of monetary policy.
Progress! And arguably this is a Keynesian result:
In fact, our result resembles the celebrated analysis by Keynes (1940). Keynes argued that when output is constrained (in our case, because of supply chain disruptions, in Britain’s case in 1940, because of resources employed in World War II), policymakers can lower aggregate demand aggressively to prevent inflation without much fear of lowering production.
As I mention in GOAT, How to Pay for the War remains a neglected and underrated work by Keynes. Note this as well:
We document how supply chain shocks drove inflation during 2021 but that, in 2022, traditional demand and supply shocks also played an important role in explaining inflation.
The pure supply-side story, as you have been hearing from Krugman just isn’t going to work, it is time to give it up.
By the way, yet another advance in this lengthy paper is this (from JFV): “…we have satellite information about every single container ship of the world in real time (ID, geolocation, speed, draft, heading,…), which allows us to do tons of things in terms of machine learning and time series econometrics that people have not been able to do before.”
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Economics, Uncategorized
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