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 2023-07-06T06:54:50Z
• dc.date.available 2023-07-06T06:54:50Z
• dc.date.issued 2023
• 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.description.sponsorship Luca Fornaro acknowledges financial support from the European Research Council under the European Union’s Horizon 2020 research and innovation program, Starting Grant (851896-KEYNESGROWTH) and the Spanish Ministry of Economy and Competitiveness, through the Severo Ochoa Programme for Centres of Excellence in R&D (CEX2019-000915-S), and from the Generalitat de Catalunya, through CERCA and SGR Programme (2017-SGR-1393).
• dc.format.mimetype application/pdf
• dc.identifier.citation Fornaro L, Wolf M. The scars of supply shocks: implications for monetary policy. J Monet Econ. 2023 Nov;140:S18-S36. DOI: 10.1016/j.jmoneco.2023.04.003
• dc.identifier.doi http://dx.doi.org/10.1016/j.jmoneco.2023.04.003
• dc.identifier.issn 0304-3932
• dc.identifier.uri http://hdl.handle.net/10230/57478
• dc.language.iso eng
• dc.publisher Elsevier
• dc.relation.ispartof Journal of Monetary Economics. 2023;140:sS18-S36.
• dc.relation.projectID info:eu-repo/grantAgreement/EC/H2020/851896
• dc.relation.projectID info:eu-repo/grantAgreement/ES/2PE/CEX2019-000915-S
• dc.rights © 2023 The Authors. This is an open access article under the CC BY license (http://creativecommons.org/licenses/by/4.0/)
• dc.rights.accessRights info:eu-repo/semantics/openAccess
• dc.rights.uri http://creativecommons.org/licenses/by/4.0/
• 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.title The scars of supply shocks: implications for monetary policy
• dc.type info:eu-repo/semantics/article
• dc.type.version info:eu-repo/semantics/publishedVersion