Monetary Policy Without a Frozen Aggregate Supply Curve. A Literature Review..
Purpose - The article reviews the literature on the interactions between aggregate demand and aggregate supply and discusses the relevance of the presented mechanisms for the current economic situation, especially due to the ongoing monetary tightening in major economies.
Research method – The article is based on the study of the existing literature on the linkages between aggregate demand and aggregate supply shocks.
Results – According to the presented models it is especially heightened level of corporate debt that makes firms more vulnerable to financial shocks, including an unexpected increase in interest rates. As a result, tight credit conditions (due to monetary tightening) may translate into a decline of not only aggregate demand, but also aggregate supply with ambiguous effects for the general price level and inflation rates.
Originality /value / implications /recommendations - The review summarizes a broad, but currently heavily overlooked literature on the links between aggregate demand disturbances and shocks to aggregate supply. The originality of the paper stems from an attempt to present that literature with the relevance to the ongoing increases in policy interest rates in various economies in the world.
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