Pandemic Inflation: Demand Shocks and Supply Slopes

The ongoing debate on the drivers of pandemic inflation has yet to yield a consensus on the relative roles of demand and supply shocks. Using Bayesian structural VAR with sign restrictions, I assess their respective contributions and find that demand forces play a predominant role. To explore the mechanisms behind this result, I estimate the slope of the Phillips Curve within a bivariate VAR framework which uncovers a surprisingly steep slope. I finally perform a counterfactual analysis, proposing the Phillips Multiplier as an additional identification restriction, to combine with classical sign restrictions, in order to reduce the width of the identified set of impulse responses with plausible AS curve slope. I find a sensibly larger contribution of supply disturbances which account for 66% of the inflation observed during the peak of 2022:Q4.