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The Twin Supply Shocks to Canada's Post-Pandemic\\Inflation and Monetary Policy

Author

Listed:
  • Trevor Tombe

    (University of Calgary)

  • Yu (Sonja) Chen

    (University of Calgary)

Abstract

Canada's inflation rate rose from 3.1 percent in June 2021 to 8.1 percent one year later. Monetary policy is consequently tightening. We explore some causes and consequences of these developments. Using detailed price and quantity data, we separately identify demand- from supply-driven inflation. We find two-thirds of Canada's accelerating inflation since Q1 2020 is supply-driven, which complicates monetary policy. Another supply shock --- large increases in bank reserves --- may complicate it further. We estimate that ample reserves and rising interest rates may cause large financial losses for the Bank of Canada. This creates novel reputational and communications challenges for the Bank and highlights underappreciated connections between monetary and fiscal policy. These twin supply shocks --- to consumer products and overnight balances --- are important aspects of Canada's recent inflation and monetary policy experiences.

Suggested Citation

  • Trevor Tombe & Yu (Sonja) Chen, "undated". "The Twin Supply Shocks to Canada's Post-Pandemic\\Inflation and Monetary Policy," Working Papers 2022-03, Department of Economics, University of Calgary, revised 01 Sep 2022.
  • Handle: RePEc:clg:wpaper:2022-03
    as

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    More about this item

    Keywords

    inflation; supply shocks; monetary policy; Bank of Canada; interest on reserves;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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