CORE DP 2025 / 14

The transmission of shocks across sectors and the dynamics of sectoral prices / Francesca Monti, Leïla Van Keirsbilck 

> This paper explores the dynamics o fU.S. sectoral producer prices in a large Bayesian vector autoregressive (BVAR) model with prior that incorporates information from the Input-Output (IO) matrix to structure the long-run relationships between these time series. The forecasts of headline inflation generated with this model have accuracy comparable to those from the Survey of Professional Forecasters (SPF) and greater than the ones generated by a standard BVAR with Minnesota priors, confirming that the IO matrix long-run prior conveys relevant information about the data. We analyze the effects of different types of shocks on sectoral prices and aggregate inflation, identified via external instruments – a sectoral shock (cereal price), an aggregate shock (monetary policy) and an oil supply shock – to gain insight into the role of production networks in price dynamics, studying the sectoral sources of inflation fluctuations, as well as the propagation through the production network of aggregate shocks. We trace the cascade effects through which sectoral shocks permeate through the pricing chain, finding substantial heterogeneity in the adjustment dynamics and in the contributions of each sector. The analysis of the propagation of an aggregate shock like monetary policy through the network of sectors instead sheds light on the importance of each sector in the transmission of the monetary policy shock.