Pandemic-Era Inflation Drivers and Global Spillovers

We develop a multi-country, multi-sector New Keynesian model to examine the drivers of global inflation during the pandemic and recovery periods. The model incorporates both country-sector-specific and aggregate shocks that propagate through international trade and production networks, leading to global demand-supply imbalances. Production complementarities raise non-labor costs, resulting in widespread sectoral cost-push inflation, even though the original negative labor supply shock is heterogeneous across country-sectors. Flexible exchange rate regimes absorb cross-country monetary policy differences, curbing global demand reallocation and the inflationary spillovers relative to fixed-rate regimes. The interaction of sectoral supply and aggregate demand shocks is the key to match the inflation experience of several countries, as the sectoral shocks spread through the global production network.