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Supply-side sources of inflation: evidence from OECD countries

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  • Prakash Loungani
  • Phillip Swagel

Abstract

We evaluate the merits of the \"supply-side\" view under which inflation results from sectoral shocks, and compare it with the \"classical\" view in which inflation results from aggregate factors such as variations in money growth. Using a panel VAR methodology applied to data for 13 GECD countries, we find support for a multi-shock view of inflation: supply-side shocks are statistically significant determinants of inflation, even after taking into account aggregate demand factors. While oil prices are the dominant supply-side influence, other measures such as the skewness of relative price changes are important as well. At short horizons, an innovation to skewness leads to an increase in inflation of 0.5 percentage points. As suggested by the classical view, money growth plays an increasingly important role as the time horizon lengthens.

Suggested Citation

  • Prakash Loungani & Phillip Swagel, 1995. "Supply-side sources of inflation: evidence from OECD countries," International Finance Discussion Papers 515, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:515
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    References listed on IDEAS

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    Cited by:

    1. Andrés Langebaek R. & Eliana González Molano, 2007. "Inflación Y Precios Relativos En Colombia," Borradores de Economia 459, Banco de la Republica de Colombia.
    2. María Ángeles Caraballo & Carlos Usabiaga, 2003. "Análisis de la estructura de la inflación de las regiones españolas: La metodología de Ball y Mankiw," Economic Working Papers at Centro de Estudios Andaluces E2003/44, Centro de Estudios Andaluces.
    3. Carlos Usabiaga & María à ngeles Caraballo, 2004. "Inflation and Nominal Rigidities in Spanish Regions: The Ball and Mankiw Approach," ERSA conference papers ersa04p12, European Regional Science Association.
    4. Robert Amano & Tiff Macklem, 1997. "Menu Costs, Relative Prices, and Inflation: Evidence for Canada," Staff Working Papers 97-14, Bank of Canada.
    5. Mr. Prakash Loungani & Mr. Phillip L Swagel, 2001. "Sources of Inflation in Developing Countries," IMF Working Papers 2001/198, International Monetary Fund.
    6. Brian O'Reilly, 1998. "The Benefits of Low Inflation: Taking Shock "A nickel ain't worth a dime any more" [Yogi Berra]," Technical Reports 83, Bank of Canada.
    7. Mr. Armando Méndez Morales, 1998. "Determinants of Growth in an Error: Correction Model for El Salvador," IMF Working Papers 1998/104, International Monetary Fund.
    8. Hiranya Nath, 2004. "Relative importance of sectoral and aggregate sources of price changes," Applied Economics, Taylor & Francis Journals, vol. 36(16), pages 1781-1796.

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