Explaining Episodes of High Inflation: Demand- and Supply-Side Drivers in Times of Uncertainty

Identifier:  imarina:9633088

Handle: https://hdl.handle.net/20.500.11797/imarina9633088

Authors:  Agoraki MEK; Aslanidis N; Kouretas GP

Abstract:
In this paper, we investigate the extent to which uncertainty anticipates episodes of high inflation in 30 economies worldwide. Our analysis accounts for several factors, including inflation expectations, real global economic activity, and supply chain disruptions. Using an instrumental variable (IV) approach, we identify exogenous variations in country-level uncertainty by tracking uncertainty in large global economies, which is particularly relevant for small open economies. The results indicate that periods of high uncertainty are generally associated with low inflation. Importantly, our research reveals two distinct mechanisms through which uncertainty affects inflation. Uncertainty has a negative effect on demand-driven inflation, while its effect on supply-driven inflation is positive.