Monetary policy trade-offs amid global supply chain disruptions

This paper employs a proxy structural VAR model to examine the effects of global supply chain (GSC) shocks on U.S. macroeconomic variables and the Federal Reserve’s historical response, and evaluates two counterfactual monetary policy rules using the COVID-19 episode. Large fiscal stimulus amplifies inflation while cushioning the output downturn from GSC shocks. Historically, the Fed adopted a loose stance, looking through price surges from supply chain disruptions. The first counterfactual—which stabilizes inflation—entails less accommodation and yields a more favorable inflation-output trade-off, reflecting greater price flexibility and limited output losses. The second counterfactual—which minimizes a dual-mandate loss function—calls for greater initial easing; under inflation targeting (IT) this involves moderate accommodation, while under average inflation targeting (AIT) the looser initial policy generates more persistent inflation and ultimately requires a contractionary response, worsening the trade-off.

Luis G. Hernández-Román | Macro Paper Warehouse

Monetary policy trade-offs amid global supply chain disruptions