Within the mainstream approach to which most central bankers are anchored, supply shocks can be transitory and have a permanent effect on the price level conditional on the monetary policy response. If monetary policy does not completely offset them you might achieve an equilibrium with the return of inflation to the target and price level that is higher.
I would have to refresh my knowledge, but yes, saying that a supply shock must have a step change transitory effect doesn’t even make sense from the perspective of mainstream economics that has advanced beyond Econ 101.
"Peak Economics 101" ... that's a concept everybody needs to start talking about!
Thanks this is a good blog and timely one. I share here my reply on the issue of supply shocks and price level. (see https://twitter.com/BenignoGianluca/status/1747985782936092922)
Within the mainstream approach to which most central bankers are anchored, supply shocks can be transitory and have a permanent effect on the price level conditional on the monetary policy response. If monetary policy does not completely offset them you might achieve an equilibrium with the return of inflation to the target and price level that is higher.
I would have to refresh my knowledge, but yes, saying that a supply shock must have a step change transitory effect doesn’t even make sense from the perspective of mainstream economics that has advanced beyond Econ 101.