Fiscal transfers fueled post-pandemic inflation, study finds

The analysis suggests that fiscal transfer shocks were a major contributor to the early post-pandemic increase in the price level through mid-2021.

After this period, adverse supply shocks, particularly supply-chain disruptions, became the dominant factor in rising prices.

The study highlights that these transfers were crucial in averting a decline in real output per capita comparable to that experienced during the Great Depression.

The methodology, an extension of the rotation-invariant time-varying structural vector autoregression, allows for accounting for structural change without shortening the sample, using data back to the early 1950s.

This approach enables a comprehensive analysis of demand, cost-push, global supply chain, and monetary policy shocks.

The paper contributes to the literature by focusing on exogenous fiscal transfer shocks within a time-varying SVAR, quantifying their effects on output and prices.

This focus is warranted as pandemic fiscal responses largely consisted of transfers to households, rather than government purchases.

The fiscal expansion of 2020–2021, including acts like CARES and ARP, amounted to approximately 11 percent of 2019 GDP.

The study finds that the magnitude of the price response to transfer shocks depends on the systematic monetary policy reaction.

During the pandemic, the monetary policy response was insufficient to prevent transfers from fueling inflation, whereas during the Great Recession, a forceful monetary policy response contained price pressures.