Finance and Economics Discussion Series (FEDS)
November 2023
Supply Chain Constraints and Inflation
Diego Comin, Robert Johnson, Callum Jones
Abstract:
We develop a multisector, open economy, New Keynesian framework to evaluate how potentially binding capacity constraints, and shocks to them, shape inflation. We show that binding constraints for domestic and foreign producers shift domestic and import price Phillips Curves up, similar to reduced-form markup shocks. Further, data on prices and quantities together identify whether constraints bind due to increased demand or reductions in capacity. Applying the model to interpret recent US data, we find that binding constraints explain half of the increase in inflation during 2021-2022. In particular, tight capacity served to amplify the impact of loose monetary policy in 2021, fueling the inflation takeoff.
Keywords: Monetary policy, goods constraints, import constraint, inflation, occasionally binding constraint, supply chain constraints
DOI: https://doi.org/10.17016/FEDS.2023.075
PDF: Full Paper
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