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The building blocks of inflation: The role of monetary policy and the gap between goods and services

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  • Gelfer, Sacha

Abstract

I build and estimate a three-region structural macroeconomic model with a goods, services, housing and oil sector. The model also has meaningful household portfolio decisions over foreign and domestic bond holdings and financial intermediation to investigate the efficacy of large-scale asset purchases (LSAP) by a central bank. The model is built and estimated to ensure that the potential causes that have been pointed to as a reason for the global inflation seen in the COVID recovery economy are accounted for. Examining the dynamics of the model, LSAPs conducted in an economy with relative high demand for goods rather than services will lead to a bigger expansionary and inflationary impact than in an economy where demand for services is relatively higher than goods. I also find that LSAPs are more expansionary and inflationary when the service sector is incurring supply shocks. These findings help us understand why LSAPs conducted in the global financial crisis had such a different impact than those conducted in the COVID economy.

Suggested Citation

  • Gelfer, Sacha, 2026. "The building blocks of inflation: The role of monetary policy and the gap between goods and services," Journal of Economic Dynamics and Control, Elsevier, vol. 186(C).
    • Handle: RePEc:eee:dyncon:v:186:y:2026:i:c:s0165188926000448
    DOI: 10.1016/j.jedc.2026.105298
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    Keywords

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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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