Demand vs. Supply Decomposition of Inflation: Cross-Country Evidence with Applications

October 17, 2023

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Format: Chicago

Melih Firat, and Otso Hao. Demand vs. Supply Decomposition of Inflation: Cross-Country Evidence with Applications, (USA: International Monetary Fund, 2023) accessed December 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

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.

Subject: Economic theory, Inflation, Oil prices, Oil production, Output gap, Prices, Production, Supply shocks

Keywords: Asia and Pacific, Decomposition analysis, Demand vs supply, Demand-driven inflation, Europe, Global, Inflation, Inflation decomposition, Inflation decomposition methodology, Monetary policy, Oil prices, Oil production, Output gap, Phillips curve, Supply chain pressures, Supply decomposition of inflation, Supply shocks, Supply-driven inflation

Publication Details

Pages:

43
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2023/205
Stock No:

WPIEA2023205
ISBN:

9798400257339
ISSN:

1018-5941

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