February 2023

The Inflationary Effects of Sectoral Reallocation

Francesco Ferrante, Sebastian Graves and Matteo Iacoviello


The COVID-19 pandemic has led to an unprecedented shift of consumption from services to goods. We study this demand reallocation in a multi-sector model featuring sticky prices, input-output linkages, and labor reallocation costs. Reallocation costs hamper the increase in the supply of goods, causing inflationary pressures. These pressures are amplified by the fact that goods prices are more flexible than services prices. We estimate the model allowing for demand reallocation, sectoral productivity, and aggregate labor supply shocks. The demand reallocation shock explains a large portion of the rise in U.S. inflation in the aftermath of the pandemic.

Keywords: Sectoral Reallocation, Inflation, Input-Output Models, Moment-matching exercise

DOI: https://doi.org/10.17016/IFDP.2023.1369

PDF: Full Paper

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Last Update: February 14, 2023