Supply versus demand: Unemployment and inflation in the Covid-19 recession

David Baqaee, Emmanuel Farhi

Covid-19 is an unusual combination of supply and demand shocks. These shocks propagate through supply chains, causing different sectors to become demand-constrained or supply-constrained. This column uses a disaggregated Keynesian model to identify the shocks, classify the sectors, and draw implications for policy. Negative sectoral supply shocks and shocks to the sectoral composition of demand generate more than 7% inflation, and this inflation is kept in check by a large negative aggregate demand shock. There is considerable slack in economy, with 6% Keynesian unemployment, but it is concentrated in certain sectors. As a result, untargeted aggregate demand stimulus, while desirable, is less effective than in a typical recession.

Πηγή: Voxeu

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