COVID-19 U.S. Inflation: A Fiscal Theory of the Price Level Perspective

Details

Supervisors

Oikonomou, Rigas

Faculty

Faculté des sciences économiques, sociales, politiques et de communication

Degree label

Master [120] en sciences économiques, orientation économétrie, à finalité approfondie

Abstract

While the pandemic may have ended quite some time ago, the debate as to whether the staggering rise in inflation the U.S. experienced during that period was attributable to the slow reaction of the Federal Reserve or the generosity and frequency of the stimulus packages continues. In an attempt to settle this debate, I simulate a canonical New Keynesian model with short-term debt in the vein of the fiscal theory of the price level and try to match the IRFs to the data. Depending on your political leaning, the results may or may not surprise you: both authorities are responsible for the rise in inflation during the COVID period in the U.S; consumer preference shocks appear to have the most impact on inflation, followed by general government spending shocks. Cost-push shocks adequately matches the overall inflation trend but fails in tracking output movement.