Inflation dynamics with non linear local projections: global supply chains and consumer debt in the US

Abstract

This dissertation researches the dynamics of US inflation using a novel nonlinear local projections framework. We highlight the roles of the global supply chain and consumer debt levels in monetary policy efficacy. In order to do this, we establish four regimes, constructed on transition probabilities based on the interaction of the aforementioned variables, which are known as trigger variables. This means that we asses monetary policy effectiveness on whether there’s stress in the global supply chain and simultaneously, high consumer debt levels. Hence, whilst focusing on implementing two trigger variables instead of the literature’s use of one, we find that monetary policy is limited under high supply chain stress, irrespective of consumer debt levels. Conversely, in low-stress environments, monetary policy consistently proves more successful when consumer debt is high. Utilising the Global Supply Chain Pressure Index and Total Consumer Credit as proxies for our trigger variables, the results call attention to the interplay between supply-side exogenous constraints and demand-side transmission mechanisms in shaping inflation dynamics in the US.