What is Supply-Shock Inflation?
Supply shocks are events that can cause changes in production capacity and costs. For example, changes in oil import prices; frosts, floods, and droughts that cause damage to large numbers of crops; changes in the level of labor force education in the economy, or changes in the wage rate of laborers willing to work; and even technological changes and progress And so on, it may cause changes in production capacity and production costs.
Supply shock
- Supply Shock refers to the impact on the economy that changes the cost of producing products and services, thereby changing the price level required by the manufacturer (hence the name
- Supply shocks usually cause aggregate output to
- Phillips curve
- Regarding the Phillips curve, Friedman and Phelps have proposed their possibility of long-term vertical. Some cross-country data and long-term empirical evidence also do not support the original Phillips curve, especially the supply shock of the 1970s. After the introduction of rational expectations in New Keynesianism, the view is that supply shocks will affect the short-term Phillips curve. Supply shock favors
- Supply shocks and demand shocks are dynamic effects on output and inflation, and from this we can analyze business cycle fluctuations.
- Empirical evidence from our country shows that:
- First, supply shocks will cause output growth to be negatively related to current inflation, while demand shocks will cause output growth to be positively related to current inflation.
- Second, the output gap under inflation is positively correlated with inflation-this is consistent with the Phillips curve, but the relationship between the output gap and inflation under supply shock is not obvious.
- Third, the impact of supply shocks on output growth is relatively stronger, while the impact of demand shocks on inflation is stronger. This explains that the procyclical characteristics of inflation are often observed in experience. This result means that it is easy to regulate inflation through aggregate demand management policies, but it is difficult to regulate the rate of economic growth.
- Therefore, governments and monetary authorities should use fiscal and monetary policies to stimulate economic growth and beware of their inflationary effects.