Òscar Jordà, Sanjay R. Singh, Alan M. Taylor
How will inflation dynamics unfold following the COVID-19 pandemic? This question has recently attracted a lot of attention in both policy and academic circles, yet it is difficult to answer because pandemics are a mix of demand and supply shocks that drive inflation in opposite directions (Baqaee and Farhi 2020). Moreover, the extent to which the pandemic affects inflation further depends on hysteresis effects, which leave permanent scars on the economy, and countries ability to adjust to the post-pandemic economy. Although inflation has recently picked up in some countries, this may likely be driven by transitory factors. The literature also provides little guidance, as it has focused mostly on the short-run economic impact of pandemics (e.g. Eichenbaum et al., 2020a, 2020b, 2020c, Brinca et al. 2020). Less is known about its potential long-run effects.
Yves here. This article provides an interesting counterargument to the widespread belief that Covid-related stimulus will generate inflation. Aside from the fact that the economy was below capacity before the Covid crisis (supported by the high level of involuntary part-time employment) and therefore its ability to support more demand is likely high than deficit hawks would have you believe, the lack of labor bargaining power will seriously dampen any one-shot spending from producing sustained wage gains. And remember, in an services-dominant economy, labor costs are the single biggest cost category.
And I am very fond of this sort of analysis. Ken Rogoff’s and Carmen Reinhardt’s study of 800 years of financial crises produced the important finding that high levels of international capital flows are strongly correlated with financial blowups.
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