Effects of Fiscal Policy on Inflation: Implications of Supply Disruptions and Economic Slack: Working Paper 2023-05
Working Paper
This paper provides evidence that supply disruptions, low economic slack, and the interaction of restrained supply with low slack each amplify the effects of expansionary fiscal policies on inflation.
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 suggest that supply disruptions, low economic slack, and the interaction of restrained supply with low slack each amplify the effects of expansionary fiscal policies on inflation.
