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The scars of supply shocks: implications for monetary policy

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dc.contributor.author Fornaro, Luca
dc.contributor.author Wolf, Martin
dc.date.accessioned 2022-11-22T08:47:24Z
dc.date.available 2022-11-22T08:47:24Z
dc.date.issued 2023-03
dc.identifier.uri http://hdl.handle.net/10230/54963
dc.description A previous version of this paper circulated under the title “The scars of supply shocks”
dc.description.abstract We study the effects of supply disruptions - for instance due to energy price shocks or the emergence of a pandemic - in an economy with Keynesian unemployment and endogenous productivity growth. By temporarily disrupting investment, negative supply shocks generate permanent output losses - or scarring effects. By inducing a negative wealth effect, scarring effects depress aggregate demand, which may even fall below the exogenous fall in supply. However, that scarring effects depress aggregate demand does not necessarily translate into low rates of inflation. On the contrary, scarring effects may reinforce and prolong the inflationary impact of supply disruptions. A contractionary monetary policy response may end up deepening scarring effects and increasing inflation in the medium run. A successful disinflation may require a policy mix of monetary tightening and fiscal interventions aiming at supporting business investment and the economy’s productive capacity.
dc.format.mimetype application/pdf
dc.language eng
dc.language.iso eng
dc.title The scars of supply shocks: implications for monetary policy
dc.type info:eu-repo/semantics/workingPaper
dc.subject.keyword Energy shocks
dc.subject.keyword Hysteresis
dc.subject.keyword Investment
dc.subject.keyword Endogenous growth
dc.subject.keyword Inflation
dc.subject.keyword Covid-19
dc.rights.accessRights info:eu-repo/semantics/openAccess


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