Supply Chain Disruptions, Inflation and Monetary Policy
Abstract: Widespread supply chain disruptions caused by the COVID-19 pandemic are often viewed as one of major contributors to extremely elevated levels of inflation observed in advanced economies starting from 2021. For instance, supply chain disruptions and/or bottlenecks as a major contributor to inflationary pressure in the US are now cited by the Fed in its official publications approximately seven times more often than before the pandemic. However, standard macroeconomic models are usually silent on international supply chains as a potential source of business cycles. This project aims to fill this gap and develops relatively tractable theoretical framework to study supply chain shocks and their propagation into wider economy. In the model supply chain shock is defined as an exogenous increase to average delivery time of intermediate inputs used in production. I then use the model to quantify the contribution of increased delivery times to elevated
inflation numbers in the US in 2021-22 and access their ability to explain the ongoing inflation surge.