European Central Bank working paper finds no statistical macroeconomic regime break in March 2020 and distinguishes supply chain and energy shock inflation effects

The European Central Bank published Working Paper No 3120 assessing whether the COVID-19 pandemic and the energy shock linked to Russia’s invasion of Ukraine signal a new macroeconomic regime in the euro area, and how supply chain disruption and energy supply shocks transmit to inflation and output. Using euro area data from January 1999 to June 2024, the authors report no statistical evidence of a structural break in March 2020 and find that both shock types were initially elevated but have been gradually returning towards pre-pandemic levels. Results from linear and nonlinear structural VAR models indicate that supply chain disruptions operate as persistent cost-push shocks, raising medium-term inflation expectations and headline HICP with effects peaking around 18 to 24 months after the initial shock, while also depressing real GDP more strongly in low-growth periods. Energy supply shocks show a more transitory inflation effect and an insignificant impact on expected inflation, but are associated with more pronounced medium-term GDP losses; in the linear model, a one-standard-deviation energy supply shock increases energy prices by 1.1% on impact and headline HICP by 0.1%. Sectoral findings highlight greater vulnerability of the automotive supply chain and energy-intensive industries when overall macroeconomic conditions are weak.