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Effects of Fiscal Policy on Inflation: Implications of Supply Disruptions and Economic Slack: Working Paper 2023-05

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  • U. Devrim Demirel
  • Matthew Wilson

Abstract

Fiscal policy provided substantial support to economic growth in 2020 and 2021 amid disruptions to supply in product and labor markets, adding to the inflationary pressures that emerged during the strong rebound from the pandemic-induced recession. In this paper, we investigate the implications of supply disruptions and economic slack for the inflationary effects of fiscal policy. We propose and estimate a nonlinear Phillips curve, whereby the sensitivity of inflation to changes in demand varies with supply conditions and the amount of slack in the economy. Our results

Suggested Citation

  • U. Devrim Demirel & Matthew Wilson, 2023. "Effects of Fiscal Policy on Inflation: Implications of Supply Disruptions and Economic Slack: Working Paper 2023-05," Working Papers 59056, Congressional Budget Office.
    • Handle: RePEc:cbo:wpaper:59056
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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