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Pandemic Preference Shocks and Inflation in a New Keynesian Model

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  • William D. Craighead

    (United States Air Force Academy)

Abstract

This paper examines two types of preference shocks, shocks to the disutility of working and to the demand for goods relative to services, in an otherwise standard New Keynesian model. Existing literature has primarily focused on productivity and monetary shocks as driving processes. The contribution of this paper is to construct model-based processes for both types of preference shocks using United States data over 1948–2022 from the Bureau of Economic Analysis and Bureau of Labor Statistics and investigate the resulting dynamics in the New Keynesian framework. Constructing historical processes for the shocks provides context for examining the shifts that occurred during the coronavirus pandemic. Both preference shocks show movements of unprecedented magnitude that coincide with the pandemic. In the model, the relative demand shock leads to opposite movements in inflation and labor between the two sectors, while the shock to labor disutility is stagflationary, with inflation rising and output decreasing. A pandemic-motivated experiment with simultaneous large shocks to both labor disutility and relative goods demand generates divergences between the sectors in inflation and labor, but higher inflation and reduced output overall. This demonstrates that preference shocks may be useful for understanding the pandemic-era economy and suggests that they deserve more attention from economists and policymakers.

Suggested Citation

  • William D. Craighead, 2022. "Pandemic Preference Shocks and Inflation in a New Keynesian Model," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 50(3), pages 133-146, December.
  • Handle: RePEc:kap:atlecj:v:50:y:2022:i:3:d:10.1007_s11293-022-09752-7
    DOI: 10.1007/s11293-022-09752-7
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    More about this item

    Keywords

    Labor supply; Relative demand; New Keynesian model; COVID-19;
    All these keywords.

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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