Supply or Demand? Findings from the Price-Setting Behavior of German Companies during the Coronavirus Crisis

The extent and design of effective measures depend on the relative strength of the shifts in supply and demand in the coronavirus crisis. Using the price-setting behavior of German companies, the authors examine the relative importance of supply and demand during the Covid-19 pandemic. The findings show that demand effects play a dominant role in the early phase of the coronavirus crisis. As a consequence of the significant decline in overall demand, producer price inflation is projected to decline by up to an additional 1.5 percentage points until August 2020 due to the coronavirus crisis. Fiscal policy measures to strengthen aggregate demand can therefore contribute significantly to economic stabilization.