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Supply Chain Constraints and Inflation

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  • Diego A. Comin
  • Robert C. Johnson
  • Callum J. Jones

Abstract

We develop a 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. 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 in the goods sector 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.

Suggested Citation

  • Diego A. Comin & Robert C. Johnson & Callum J. Jones, 2023. "Supply Chain Constraints and Inflation," NBER Working Papers 31179, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:31179
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    1. Mariano Kulish & Adrian Pagan, 2017. "Estimation and Solution of Models with Expectations and Structural Changes," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 32(2), pages 255-274, March.
    2. Julian di Giovanni & Ṣebnem Kalemli-Özcan & Alvaro Silva & Muhammed A. Yildirim, 2022. "Global Supply Chain Pressures, International Trade, and Inflation," NBER Working Papers 30240, National Bureau of Economic Research, Inc.
    3. Sims, Eric & Wolff, Jonathan, 2017. "State-dependent fiscal multipliers: Calvo vs. Rotemberg," Economics Letters, Elsevier, vol. 159(C), pages 190-194.
    4. Flora Haberkorn & Anderson Monken & Eva Van Leemput & Henry L. Young, 2021. "Effects of Supply Chain Bottlenecks on Prices using Textual Analysis," FEDS Notes 2021-12-03-2, Board of Governors of the Federal Reserve System (U.S.).
    5. Julian di Giovanni & Şebnem Kalemli-Özcan & Alvaro Silva & Muhammed A. Yıldırım, 2023. "Quantifying the Inflationary Impact of Fiscal Stimulus under Supply Constraints," AEA Papers and Proceedings, American Economic Association, vol. 113, pages 76-80, May.
    6. Guerrieri, Luca & Iacoviello, Matteo, 2015. "OccBin: A toolkit for solving dynamic models with occasionally binding constraints easily," Journal of Monetary Economics, Elsevier, vol. 70(C), pages 22-38.
    7. Mary Amiti & Sebastian Heise & Fatih Karahan & Ayşegül Şahin, 2024. "Inflation Strikes Back: The Role of Import Competition and the Labor Market," NBER Macroeconomics Annual, University of Chicago Press, vol. 38(1), pages 71-131.
    8. Francois de Soyres & Ana Maria Santacreu & Henry L. Young, 2023. "Demand-Supply Imbalance during the COVID-19 Pandemic: The Role of Fiscal Policy," Review, Federal Reserve Bank of St. Louis, vol. 105(1), pages 21-50, January.
    9. Jing Cynthia Wu & Fan Dora Xia, 2016. "Measuring the Macroeconomic Impact of Monetary Policy at the Zero Lower Bound," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(2-3), pages 253-291, March.
    10. Adam Cagliarini & Mariano Kulish, 2013. "Solving Linear Rational Expectations Models with Predictable Structural Changes," The Review of Economics and Statistics, MIT Press, vol. 95(1), pages 328-336, March.
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    Cited by:

    1. Crump, Richard K. & Eusepi, Stefano & Giannoni, Marc & Şahin, Ayşegül, 2024. "The unemployment–inflation trade-off revisited: The Phillips curve in COVID times," Journal of Monetary Economics, Elsevier, vol. 145(S).
    2. Xiwen Bai & Jesús Fernández-Villaverde & Yiliang Li & Francesco Zanetti, 2024. "The Causal Effects of Global Supply Chain Disruptions on Macroeconomic Outcomes: Evidence and Theory," Economics Series Working Papers 1033, University of Oxford, Department of Economics.
    3. Balleer, Almut & Noeller, Marvin, 2023. "Monetary policy in the presence of supply constraints: Evidence from German firm-level data," Ruhr Economic Papers 1060, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    4. Viral V. Acharya & Matteo Crosignani & Tim Eisert & Christian Eufinger, 2023. "How Do Supply Shocks to Inflation Generalize? Evidence from the Pandemic Era in Europe," NBER Working Papers 31790, National Bureau of Economic Research, Inc.
    5. Ascari, Guido & Grazzini, Jakob & Massaro, Domenico, 2024. "Great Layoff, Great Retirement and Post-pandemic Inflation," CEPR Discussion Papers 19068, C.E.P.R. Discussion Papers.
    6. Gornemann, Nils & Hildebrand, Sebastian & Kuester, Keith, 2024. "Limited (energy) supply, monetary policy, and sunspots," European Economic Review, Elsevier, vol. 168(C).

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    More about this item

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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