Pandemic-Era Inflation Drivers and Global Spillovers Julian di Giovanni | Şebnem Kalemli-Özcan | Alvaro Silva | Muhammed A. Yıldırım NO. 1080 NOVEMBER 2023 Pandemic-Era Inflation Drivers and Global Spillovers Julian di Giovanni, Şebnem Kalemli-Özcan, Alvaro Silva, and Muhammed A. Yıldırım Federal Reserve Bank of New York Staff Reports, no. 1080 November 2023 https://doi.org/10.59576/sr.1080 Abstract We estimate a multi-country, multi-sector New Keynesian model to quantify the drivers of domestic inflation during 2020–23 in several countries, including the United States. The model matches observed inflation together with sector-level prices and wages. We further measure the relative importance of different types of shocks on inflation across countries over time. The key mechanism, the international transmission of demand, supply and energy shocks through global linkages helps us to match the behavior of the USD/EUR exchange rate. The quantification exercise yields four key findings. First, negative supply shocks to factors of production, labor and intermediate inputs, initially sparked inflation in 2020-21. Global supply chains and complementarities in production played an amplification role in this initial phase. Second, positive aggregate demand shocks, due to stimulative policies, widened demand-supply imbalances, amplifying inflation further during 2021-22. Third, the reallocation of consumption between goods and service sectors, a relative sector-level demand shock, played a role in transmitting these imbalances across countries through the global trade and production network. Fourth, global energy shocks have differential impacts on the U.S. relative to other countries’ inflation rates. Further, complementarities between energy and other inputs to production play a particularly important role in the quantitative impact of these shocks on inflation. JEL classification: E2, E3, E6, F1, F4 Keywords: inflation, international spillovers, global production network _________________ Giovanni: Federal Reserve Bank of New York, CEPR (email: julian.digiovanni@ny.frb.org). Kalemli-Özcan: University of Maryland, CEPR, NBER (email: kalemli@umd.edu). Silva: University of Maryland (email: asilvub@umd.edu). Yıldırım: Harvard University, Koç University (email: muhammed_yildirim@hks.harvard.edu). The authors thank participants at the 2023 Bank of Italy-ECB-World Bank Workshop on “Trade, Value Chains, and Financial Linkages in the Global Economy,” the Summer School in International Economics by the Journal of International Economics (2023 ed.), and the RBA Annual Conference (2023) for insightful comments. This paper presents preliminary findings and is being distributed to economists and other interested readers solely to stimulate discussion and elicit comments. The views expressed in this paper are those of the author(s) and do not necessarily reflect the position of the Federal...
