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Europe > Ukraine

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Cover IMF Working Papers
The Consequences of Falling Behind the Curve: Inflation Shocks and Policy Delays Under Rational and Behavioral Expectations
Mai Hakamada
and
Carl E. Walsh
Central banks in major industrialized economies were slow to react to the surge in inflation that began in early 2021. The proximate causes of this surge were the supply chain disruptions associated with the easing of COVID restrictions, fiscal policies designed to cushion the economic impact of COVID, and the impact on commodity prices and supply chains of the war in Ukraine. We investigate the consequences of policy delay in responding to inflation shocks. First, using a simple three-period model, we show how policy delay worsens inflation outcomes, but can mitigate or even reverse the output decline that occurs when policy responds without delay. Then, using a calibrated new Keynesian framework and two measures of loss that incorporate a “balanced approach” to weigh inflation and the output gap, we find that loss is monotonically increasing in the length of the delay. Loss is reduced if policy, when it does react, is more aggressive. To investigate whether these results are sensitive to the assumption of rational expectations, we consider cognitive discounting as an alternative assumption about expectations. With cognitive discounting, forward guidance is less powerful and results in a reduction in the costs of delay. Under either assumption about expectations, the costs of a short delay can be eliminated by adopting a less inertial policy rule and a more aggressive response to inflation.
Keywords:
monetary policy; inflation policy delay; behavioral expectations; falling behind the curve; Policy delay; inflation outcome; inflation shock; supply chain disruption; trend inflation; Inflation; Output gap; Rational expectations; Central bank policy rate; Real interest rates
Cover IMF Working Papers
Demand vs. Supply Decomposition of Inflation: Cross-Country Evidence with Applications
Melih Firat
and
Otso Hao
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.
Keywords:
Inflation decomposition; demand vs supply; Phillips curve; monetary policy; supply chain pressures; supply decomposition of inflation; demand-driven inflation; supply-driven inflation; decomposition analysis; inflation decomposition methodology; Inflation; Supply shocks; Oil production; Output gap; Oil prices; Global; Asia and Pacific; Europe
Cover IMF Working Papers
Assessing the Impact of Supply Disruptions on the Global Pandemic Recovery
Harri Kemp
,
Mr. Rafael A Portillo
, and
Marika Santoro
We estimate the role of (pre-Ukraine war) supply disruptions in constraining the Covid-19 pandemic recovery, for several advanced economies and emerging markets, and globally. We rely on two approaches. In the first approach, we use sign-restricted Vector Auto Regressions (SVAR) to identify supply and demand shocks in manufacturing, based on the co-movement of surveys on new orders and suppliers’ delivery times. The effects of these shocks on industrial production and GDP are recovered through a combination of local projection methods and the input-output framework in Acemoglu et al. (2016). In the second approach, we use the IMF’s G20 model to gauge the importance of supply shocks in jointly driving activity and inflation surprises. We find that supply disruptions subtracted between 0.5 and 1.2 percent from global value added during the global recovery in 2021, while also adding about 1 percent to global core inflation that same year.
Keywords:
Supply constraints; manufacturing; output; inflation; supply and demand demand shock; Ukraine war; supply disruption; supply-demand decomposition; inflation deviation; Supply shocks; Economic recovery; Industrial production; Global
Cover IMF Staff Country Reports
Slovak Republic: Selected Issues
International Monetary Fund. European Dept.
This Selected Issues paper on Slovak Republic focuses on supply bottlenecks in 2021. With a shift in global consumer spending toward goods, shortages of inputs and labor and logistical bottlenecks, supply bottlenecks were a prominent feature of the 2021 economic landscape, slowing the pace of the recovery and pushing up inflation. Using an empirical approach to quantify the impact of supply and demand shocks, this selected issue paper finds that supply shocks had a particularly pronounced effect in Slovakia, exerting a sizable drag on industrial production, and contributing significantly to producer price inflation. We find that in 2021H2 in Slovakia, manufacturing output would have been 15 percent higher and 60 percent of the increase in manufacturing producer price inflation would not have occurred in the absence of supply bottlenecks. The greater vulnerability of the Slovak economy to supply bottlenecks is consistent with its sizable auto sector, specialization in downstream activities, and high degree of integration into global value chains. The findings suggest that Slovakia remains highly exposed to supply shocks if the disruptions experienced in 2021 were to persist in 2022 or be amplified by the war in Ukraine.
Keywords:
Core CPI inflation in Slovakia; PPI inflation; demand and supply supply shock; B. emission trend; International Monetary Fund Washington, d.c; Carbon tax; Greenhouse gas emissions; Supply shocks; Inflation; Manufacturing; Global; Europe