Francesco Furlanetto, Ørjan Robstad, Pål Ulvedal, Antoine Lepetit, 09 November 2020

Modern macroeconomic models imply that demand factors have only a small transitory effect, if any, on the productive capacity of the economy. By extending the econometric framework proposed by Blanchard and Quah, this column enables fluctuations in aggregate demand to have a long-run impact on the productive capacity through hysteresis effects. It finds that these demand shocks are quantitatively important in the US, in particular if the Great Recession is included in the sample. More specifically, demand-driven recessions lead to a persistent decline in employment and investment but leave labour productivity largely unaffected.

Almut Balleer, Sebastian Link, Manuel Menkhoff, Peter Zorn, 27 July 2020

The relative importance of supply and demand during the Covid-19 pandemic is a key input into effective policy design. This column uses firm-level data on planned price changes by firms from a monthly survey covering all relevant sectors of the German economy to show that both demand and supply forces coexist, but that demand deficiencies dominate in the short run.

David Baqaee, Emmanuel Farhi, 29 June 2020

Covid-19 is an unusual combination of supply and demand shocks. These shocks propagate through supply chains, causing different sectors to become demand-constrained or supply-constrained. This column uses a disaggregated Keynesian model to identify the shocks, classify the sectors, and draw implications for policy. Negative sectoral supply shocks and shocks to the sectoral composition of demand generate more than 7% inflation, and this inflation is kept in check by a large negative aggregate demand shock. There is considerable slack in economy, with 6% Keynesian unemployment, but it is concentrated in certain sectors. As a result, untargeted aggregate demand stimulus, while desirable, is less effective than in a typical recession. 

Pedro Brinca, Joao B. Duarte, Miguel Faria e Castro, 17 June 2020

Recent academic discussions have sought to understand whether the economic impact of the COVID-19 crisis and associated lockdown should be ascribed to demand or supply shocks. This debate is of some importance since the underlying shock can have significant implications for stabilisation policy. This column tries to answer these questions by using data on hours worked and wages to estimate labour demand and supply shocks for the aggregate economy and for different sectors through an econometric model. It finds that while labour supply shocks accounted for a larger share of the fall in hours, both shocks were important.

Veronica Guerrieri, Guido Lorenzoni, Ludwig Straub, Iván Werning, 06 May 2020

The Covid-19 pandemic and the policies taken to control its spread have many features of an aggregate supply shock, as workers who stay home are prevented from producing goods and services. This column argues that when a supply shock asymmetrically affects different sectors of the economy, it can produce a contraction in demand even larger than the original shock, leading to deflationary pressures. This is due to complementarities across sectors and the fact that workers in different sectors are differentially affected and lack insurance.

Stephen Cecchetti, Kim Schoenholtz, 25 July 2018

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