The Dominant Role of Expectations and Broad-Based Supply Shocks in Driving Inflation

The Euro Area remains a well-known monetary union in the World. But the possibilities of creation of new monetary unions are discussed. It is spoken about NAFTA (Canada, Mexico and the United States) or MERCOSUR (Argentina, Brazil, Paraguay, Uruguay and Venezuela). The aim of this paper is to assess the similarity of demand and supply shocks in the countries of NAFTA and MERCOSUR, and to compare it with the countries of the Euro Area. For these aims, correlation and structural vector autoregression methods are used. Methods are based on Blanchard and Quah (1989) and Bayoumi and Eichengreen (1993). We confirm the existence of core states and periphery states in the Euro Area with some exceptions. If we compare supply and demand shocks, we find more similarity in the case of supply shocks in the countries of the Euro Area. According to the results, the countries of NAFTA are more appropriate for the creation of monetary union than the countries of MERCOSUR. The countries of NAFTA achieve high correlation coefficients of supply and demand shocks (except Mexico for supply shocks).

We provide a few new empirical facts that theoretical models should feature in order to be consistent with the data. (i) There are two classes of shocks: demand and supply. Supply shocks have long-run effects on economic activity; demand shocks do not. (ii) Both supply and demand shocks are important sources of business cycles' fluctuations. (iii) Supply shocks are the primary driver for consumption fluctuations, demand shocks for investment. (iv) The demand shock is closely related to the credit spread, while the supply shock is essentially a news shock. The results are obtained using a novel frequency domain method. (JEL C32, E32)

We extract aggregate supply and aggregate demand shocks for the US economy from macroeconomic data on inflation, real GDP growth, core inflation and the unemployment gap. We first use unconditional non-Gaussian features in the data to achieve identification of these structural shocks while imposing minimal economic assumptions. We find that recessions in the 1970s and 1980s are better characterized as driven by supply shocks while later recessions were driven primarily by demand shocks. The Great Recession exhibited large negative shocks to both demand and supply. We then use conditional (time-varying) non-Gaussian features of the structural shocks to estimate risk for supply and demand shocks that drive (negatively skewed) and (positively skewed) variation for supply and demand shocks. The Great Moderation, a general decline in the volatility of many macroeconomic time series since the 1980s, is mostly accounted for by a reduction in the good demand variance risk factor. In contrast, the risk factors driving bad variance for both supply and demand shocks, which account for most recessions, show no secular decline. Finally, we find that macro risks significantly contribute to the variation in yields, bond risk premiums and the term premium. While overall bond risk premiums are counter-cyclical, an increase in bad demand variance is associated with lower risk premiums on bonds.

This paper presents estimates of the short-run aggregate supply and demand curves for the post-war U.S. economy using a structural vector autoregression (SVAR). Following the work of Blanchard and Quah [4] (henceforth BQ) I assume that aggregate demand shocks have no long-run impact on the log of real output. In contrast to BQ I use aggregate output and prices while they use aggregate output and the unemployment rate. By replacing unemployment with prices I can estimate the slopes of the aggregate supply and demand curves for the U.S. economy. My purpose in extending the work of BQ in this direction is threefold. First, to investigate whether the decomposition method proposed by BQ yields textbook aggregate demand and supply curves; second, to investigate whether the supply and demand shocks derived from this method correspond to historical demand and supply shocks; and third, to test the stability of the slope of the aggregate supply curve. The once-well-accepted stylized characterization of prices as procyclical has recently been questioned (Kydland and Prescott [13] and Wolf [23]). Procyclical prices were previously thought to be evidence that the cycle was aggregate demand driven. The studies by Kydland and Prescott and Wolf show that prices are either acyclical or countercyclical thus indicating that aggregate supply shocks may play a role in business cycle fluctuations. In this paper I test whether, once output movements and prices are decomposed into demand and supply driven components, the aggregate demand induced movements in prices are procyclical and the aggregate supply induced movements in prices are countercyclical. I find that the aggregate supply curve does slope upward and the aggregate demand curve does slope downward. Thus, the evidence presented here is consistent with the notion that the lack of a consistent cyclical pattern in the price level is due to the fact that both demand and supply shocks generate business cycle fluctuations. Secondly, I extend BQ by investigating whether the movements in output and prices due to aggregate demand and supply shocks correspond to specific episodes of demand and supply shocks during the post-war era as defined by independent sources. For example, does this estimation technique attribute movements in output due to oil price shocks to aggregate supply and

This paper explores the effect of inflation supply and demand shocks on government debt. It identifies the shocks using a sign-restricted Structural Vector Autoregression (SVAR) model with quarterly data. Estimations of dynamic panel regressions and local projections suggest that supply shocks lead to persistent increases in government debt, while demand shocks result in long-lasting declines. Furthermore, high debt levels increase economic vulnerability, amplifying the impacts of both supply and demand shocks by more than three times. Specifically, supply shocks increase debt through higher borrowing costs and more prolonged depreciation, whereas demand shocks erode debt through persistent reductions in primary balance, driven by increased revenues.

The objective of the paper is to estimate the asymmetric response of firms for prices to supply and demand shocks. Firms give an asymmetric response to supply and demand shocks while setting at a price, and the prices are upward flexible and downward rigid to changes in the determinants. Asymmetric response to the cost of raw material is highest. Moreover, the seasonal factors have the lowest degree of asymmetric response. Firms give an asymmetric response to different shocks, with respect to a price increase and decrease, and across variables of demand-side and supply side. The central bank has to focus more on stabilization in response to supply shocks than to demand shocks because supply shocks are found more important than demand shocks to change the prices of firms. Measures should be taken to prevent the possible effects of adverse supply shocks.

This paper investigates the effects of China on the BRIS countries, namely Brazil, Russia, India and South Africa. We identify Chinese supply and demand shocks and assess their transmission to BRIS in a structural dynamic factor model framework estimated over the period 1995Q2‐2009Q4. The findings show that Chinese supply shocks are more important than its demand shocks. Supply shocks produce positive and significant output responses in all BRIS countries. And while these supply shocks have a permanent impact on the BRIS countries, the effects of demand shocks are short‐lived. Both supply and demand shocks are transmitted through trade rather than financial linkages. However, the responses of the BRIS countries are heterogeneous and therefore require country‐specific policy responses.

Debt erosion: Asymmetric response to demand and supply shocks

This paper uses a structural VAR methodology to identify aggregate demand and supply shocks to real output for the South African economy. Demand shocks, in turn, are separated into fiscal and monetary shocks. The model is estimated with quarterly data over two overlapping samples: 1960Q2--2006Q4 and 1983Q4--2006Q4. The identified (structural) shocks were used in a historical decomposition to split output into a measure of potential output (resulting from the evolution of supply shocks) and a measure of the business cycle (the gap between actual and potential output). This measure of potential output suggests a significant decline relative to trend in the years prior to the political transition of 1994 and a swift reversal thereafter. The paper presents evidence from three sources to support its identification of aggregate supply and demand shocks. These sources are the following: theory consistent impulse response functions; a close match between the implied measure of the business cycle and independent information about the South African business cycle and a demonstration of the close match between the identified series of aggregate supply shocks and important historical events in the decades prior to and following 1994 that have been identified by economic historians as important shocks to the South African economy. Copyright 2008 The author 2008. Published by Oxford University Press on behalf of the Centre for the Study of African Economies. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.

This study examines the supply and demand shocks in Pakistan that affected occupations and ind ustries during the COVID 19 pandemic. We use the remote labor index and essential scores for undertaking work activities from home across occupations proposed by del Rio Chanona et al. (2020). To estimate demand shocks, we follow del Rio Chanona et al. (2 020), who employed estimates from the US Congressional Budget Office (2006) that attempted to forecast how the US economy would be affected at the industry level if a severe influenza epidemic occurred. We document that demand shocks most significantly affect the transport and food services industries. In contrast, the manufacturing, mining and quarrying, and handicraft and printing industries are likely to be impacted by supply shocks. Food services and restaurants experience a bigger combined shock. Relative to the pre pandemic period, aggregate shocks suggest a decrease in the output of Pakistan’s economy by one fifth if the pandemic were to seriously affect the economy, threatening 21 percent of jobs and lowering total wage income by 18 percent. Considering a second wave and a new variant of coronavirus, we estimate that aggregate shocks may continue, and the economy's output could deteriorate by one fourth if the region experiences a significant outbreak. Finally, we compare our findings with the US economy and find differences between supply and demand shocks in both economies.

The worldwide COVID-19 outbreak has impacted on the domestic and international supply chains of Japanese firms. In particular, internationalized production has been blamed for working as a propagation mechanism in the worldwide spread of negative shocks. Todo and Inoue (2021) extensively review existing studies that have examined the shock propagation through supply chains and what characteristics of supply chains enhance or mitigate the propagation, in the cases of previous crises and the current COVID-19 crisis. Based on their literature review and the data observations on the current characteristics of Japan's supply chains, Todo and Inoue highlight the need for more geographical diversification in suppliers and clients of Japanese firms to build robust and resilient supply chains and improve the firms' performance. In the face of the COVID-19 crisis, there has arisen a renewed argument that shorter and simpler supply chains and reshoring production back to the domestic economy would be less vulnerable to shocks. Against this kind of turning-inward policy argument, Todo and Inoue emphasize the potential benefits from supplier substitutability and international knowledge diffusion through geographically diversified supply chains, which is quite meaningful. Nevertheless, I suspect that geographical diversification of trading partners is not the only way to build a resilient supply chain. A firm's optimal strategy for resilience might not coincide with that for robustness. The concept of system resilience was originated in the ecology literature and was applied to the risk management literature. In the light of supply chain management, resilience can be the ability to resume normal operations after an acceptable period of disruption, while robustness is the ability to maintain operations amid a crisis (Miroudot, 2020). Supplier substitutability appears to be a key to achieving robustness. Maintaining geographically diversified suppliers or alternative locations of production would enable firms to withstand a location-specific supply shock, which leads to the greater robustness. To improve resilience, on the other hand, a firm might rather prefer to develop a long-term relationship with a single supplier, or a handful of suppliers such as keiretsu, as discussed in Miroudot (2020), for example. Maintaining a less diversified but close relationship would enable a firm to receive investment or support from the partner for minimizing the time and cost of disrupted operations and facilitating recovery from the disruption, which leads to the greater resilience. Indeed, Todo and Inoue (2021) touch on the possibility that the keiretsu-type relationships would help improve resilience in the case of knowledge-intensive goods. It would be insightful if Todo and Inoue could elaborate on the implications of geographical diversification for the robustness and resilience of supply chains with more careful consideration of the two related but distinct concepts. In addition, I am skeptical of Todo and Inoue's policy suggestion that the Japanese government should intervene to promote the geographical diversification of suppliers. The diversification of suppliers is not necessarily an optimal strategy from the firm's perspective, depending on whether the firm prioritizes the robustness or resilience of supply chain as well as on the firm's product or industry characteristics. Even if the current level of diversification is less than the optimal level as argued by Todo and Inoue, a government inevitably faces implementational challenges on the intervention and possibly distorts a firm's decision on production locations and sourcing patterns, which could force the choice of an inefficient location. Rather, a government should devote itself to ensuring an environment where firms can build and develop domestic and international supply chains as they need, as a basis for economic growth, which brings greater efficiency, expands the production frontier, and facilitates technology and knowledge diffusion and spillovers. Last but not least, Todo and Inoue's literature review and accompanying discussion focus on the effects on supply chains of supply shocks such as natural disasters. When thinking of the robustness and resilience against the current COVID-19 spread, however, we should be aware that COVID-19 generated both supply and demand shocks. As a result of social-distancing policies, industries relying on the movement of people, such as hotels, restaurants, and passenger transport services, have been impacted greatly through the fall in domestic final demand. It would be worth discussing the robustness and resilience of supply chains not only against supply shocks but also against demand shocks. Does the shock propagation mechanism of supply chains matter to a similar degree and work in a similar way in the case of demand shocks as in supply shocks? The firm's strategy for robustness or resilience of concern also would depend on the source of shocks. Todo and Inoue could discuss on this further.

We provide quantitative predictions of first-order supply and demand shocks for the US economy associated with the COVID-19 pandemic at the level of individual occupations and industries. To analyse the supply shock, we classify industries as essential or non-essential and construct a Remote Labour Index, which measures the ability of different occupations to work from home. Demand shocks are based on a study of the likely effect of a severe influenza epidemic developed by the US Congressional Budget Office. Compared to the pre-COVID period, these shocks would threaten around 20 per cent of the US economy’s GDP, jeopardize 23 per cent of jobs, and reduce total wage income by 16 per cent. At the industry level, sectors such as transport are likely to be output-constrained by demand shocks, while sectors relating to manufacturing, mining, and services are more likely to be constrained by supply shocks. Entertainment, restaurants, and tourism face large supply and demand shocks. At the occupation level, we show that high-wage occupations are relatively immune from adverse supply- and demand-side shocks, while low-wage occupations are much more vulnerable. We should emphasize that our results are only first-order shocks—we expect them to be substantially amplified by feedback effects in the production network.

This paper uses a novel panel multi-level fixed effects empirical strategy to identify credit supply and demand shocks. The paper shows that banks with positive credit supply shocks on the margin expand their portfolio and engage in a risk-taking behavior. The selected bank balance sheet variables have meaningful effects on the bank supply shocks. Moreover, the bank supply and demand shocks aggregated at the bank and industry levels have significant effects on the key macroeconomic variables. The author proposes a framework for the implementation of macro prudential and monetary policy based on the estimated credit shocks.

This paper proposes a new methodology for differentiating oil demand and supply shocks using the information content of forward-looking asset prices for crude oil and refined products. Building upon the industry folk wisdom that demand and supply shocks have asymmetric passthrough dynamics through the product crack spread, the paper provides a new identification scheme without using quantity-based data. Our results suggest that the price rises of the late 1970s had a demand-driven component, the 1990-91 Gulf War shock reacted both to supply and precautionary demand shocks, the price spike in 2008 was driven more by expectations of future supply constraints than immediate demand pressures, and the recent collapse of prices in 2014 had both a demand and supply component. Oil demand and supply shocks, by our decomposition, are also shown to have different impacts on macroeconomic variables such as industrial production, unemployment, core inflation, and the Fed Funds rate, with implications for formulating an effective policy response to oil shocks.

This paper proposes a new methodology for differentiating oil demand and supply shocks using the information content of forward-looking market prices for crude oil and refined product crack spreads. Building upon the folk wisdom that demand and supply shocks have asymmetric pass through dynamics in energy financial markets, the paper provides two complementary identification schemes, based on sign restrictions and heteroskedasticity. Both approaches produce very similar historical decomposition of oil price movements. Our results suggest that the price rises of the late 1970s had a demand-driven component, the 1990-91 Gulf War shock reacted both to supply and precautionary demand shocks, and the recent price spike in 2008 was driven more by expectations of future supply constraints than immediate demand pressures. Oil demand and supply shocks, by our decomposition, are shown to have different impacts and reactions to macroeconomic variables such as industrial production, unemployment, core inflation, and the Fed Funds rate, with implications for formulating an effective policy response to oil shocks.