## Demand vs. Supply Decomposition of Inflation: Cross-Country Evidence with Applications

_IMF Working Papers, October 17, 2023_

## Source details

**Canonical URL:** [Demand vs. Supply Decomposition of Inflation: Cross-Country Evidence with Applications](https://www.imf.org/en/publications/wp/issues/2023/09/28/demand-vs-539665)

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- [Markdown version](/en/publications/wp/issues/2023/09/28/demand-vs-539665/index.md)
- [Structured JSON version](/en/publications/wp/issues/2023/09/28/demand-vs-539665/index.json)
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## Bibliographic details
- Authors: Melih Firat, Otso Hao
- Published: October 17, 2023
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400257339.001

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### Overview
- Title: Demand vs. Supply Decomposition of Inflation: Cross-Country Evidence with Applications
- Authors: Melih Firat, Otso Hao
- Publication date: October 17, 2023
- Core question: What are the contributions of demand and supply factors to inflation?

### Methodology
- Approach: Follow Shapiro (2022) to construct quarterly demand-driven and supply-driven inflation series.
- Data: Sectoral Personal Consumption Expenditures (PCE) data for 32 countries.
- Temporal focus: Highlight decompositions during critical periods such as the great financial crisis of 2008 and the recent inflation surge since 2021.

### Key findings
- Decomposition results:
  - Constructed quarterly demand-driven and supply-driven inflation series for 32 countries using sectoral PCE data.
  - Emphasized global trends and country-specific differences across episodes including 2008 and since 2021.
- Validation and responsiveness:
  - Supply-driven inflation is more reactive to oil shocks and supply chain pressures.
  - Demand-driven inflation displays a more pronounced response to monetary policy shocks.
- Phillips curve:
  - Results suggest a steeper Phillips curve when inflation is demand-driven, with implications for policy design.

### Validation and robustness evidence
- External consistency:
  - Supply-driven series correlate more with oil shocks and supply chain pressures.
  - Demand-driven series correlate more with monetary policy shocks.
- Application: Decompositions used to interpret episodes such as the great financial crisis of 2008 and the inflation surge beginning in 2021.

### Policy implications
- Policy design should account for the dominant driver of inflation:
  - When inflation is supply-driven (responsive to oil and supply chain pressures), policy responses differ from when inflation is demand-driven (responsive to monetary policy shocks).
  - The steeper Phillips curve under demand-driven inflation implies tighter trade-offs for stabilization policy when demand forces dominate.

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## Content in this bundle

- **Working Paper**
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_Source: https://www.imf.org/en/publications/wp/issues/2023/09/28/demand-vs-539665_