Introduction 1

  Literature Review 6

The Stylized Model 8

  Households 8

  Firms 9

  Market clearing and monetary policy 13

The Quantitative Model 15

  Households 15

  Firms 18

  Monetary Policy 21

  Government 21

  Market Clearing 21

  Extensions 22

  Calibration 23

Data, model simulation and fitting to data 26

  Data 26

  Bringing the model to data – identification assumptions 28

  Quasi-nonlinear counterfactual simulation 31

Model Properties 31

  Impulse-Response Functions 32

  How Model Features Impact Aggregate Response to Sectoral Shocks 35

  Supply Constraints and the Phillips Curve 38

Policy Implications 40

  How to weight sectoral inflation when there are temporary supply constraints 40

  Lessons from the 2020-2024 experience 45

Conclusion 49

References 51

Appendix A: Additional model details 55

Appendix B: Additional figures and tables 62