Pandemic Preference Shocks and Inflation in a New Keynesian Model

This paper examines two types of preference shocks - shocks to the disutility of working and to demand for goods relative to services - in an otherwise standard New Keynesian model. Model-based processes for both shocks are constructed using postwar US data, and both show movements of unprecedented magnitude that coincide with the COVID-19 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.