Working Paper: CEPR ID: DP18205
Authors: Diego Comin; Robert Johnson; Callum 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.
Keywords: No keywords provided
JEL Codes: E12; E31; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| binding capacity constraints (D24) | upward shift of domestic and import price Phillips curves (E31) |
| binding capacity constraints (D24) | inflation increase (E31) |
| tight capacity (D24) | magnified impact of loose monetary policy (E49) |
| relaxation of constraints (C62) | decline in inflation (E31) |
| demand shocks (E39) | inflation dynamics (E31) |
| negative capacity shocks (F41) | inflation dynamics (E31) |