Adverse Supply Shock

Adverse Supply Shock

Any sudden event that dramatically but (usually) temporarily decreases supply for one or more goods or services. An adverse supply shock is often (but not always) a natural event. For example, a series of severe tornados on farms in western Oklahoma can cause adverse supply shock for wheat. This reduces the amount of wheat in the market, which raises the price, assuming demand remains constant. It is a type of supply shock.
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First, it can result when the productive capacity of the economy is reduced by an adverse supply shock, such as an increase in the price of oil.
It is argued that the former (the collapse of output during transition) can be best explained as adverse supply shock caused mostly by a change in relative prices after their deregulation due to distortions in industrial structure and trade patterns accumulated during the period of central planning, and by the collapse of state institutions during transition period, while the speed of liberalisation had an adverse effect on performance, if any.
Or, put differently, an accelerating inflation rate is a leading indicator of an adverse supply shock.
For example, an adverse supply shock or money demand shock could have intervened in the first or second quarter of 1995 (other shocks).
In my paper, however, a low-inflation regime can be upset by an adverse supply shock.
Consider the effect on the ex ante real interest rate from a temporary, adverse supply shock, such as a harvest failure in an agricultural, closed economy.
In the event of an adverse supply shock, which raises prices and reduces output, inflation targeting may force the central bank to check money supply at a time when the economy is in recession.
An inflation target requires the central bank to tighten in response to an adverse supply shock and to ease monetary policy in response to a favorable supply shock, compounding the change in real output resulting from the supply shock.
When an adverse supply shock hits a two-country Mundell-Fleming world, it causes unemployment and a rise in the cost of living.
In fact, it took three large adverse supply shocks for expectations to adjust.
He, however, said adverse supply shocks, continued declining trend in commodity prices, and any setback to security situation might hamper the possibility of attaining the GDP growth target of 5.
Adverse supply shocks, continued declining trend in commodity prices, and any setback to security situation may hamper the possibility of attaining the GDP growth target of 5.