The transmission of Keynesian supply shocks

Ambrogio Cesa-Bianchi and Andrea Ferrero

No 934, Bank of England working papers from Bank of England

Abstract: Sectoral supply shocks can trigger shortages in aggregate demand when strong sectoral complementarities are at play. US data on sectoral output and prices offer support to this notion of ‘Keynesian supply shocks’ and their underlying transmission mechanism. Demand shocks derived from standard identification schemes using aggregate data can originate from sectoral supply shocks that spillover to other sectors via a Keynesian supply mechanism. This finding is a regular feature of the data and is independent of the effects of the 2020 pandemic. In a New Keynesian model with input-output network calibrated to three-digit US data, sectoral productivity shocks generate the same pattern for output growth and inflation as observed in the data. The degree of sectoral interconnection, both upstream and downstream, and price stickiness are key determinants of the strength of the mechanism. Sectoral shocks may account for a larger fraction of business-cycle fluctuations than previously thought.

Keywords: Keynesian supply shocks; input-output matrix; granular fluctuations; approximate factor model (search for similar items in EconPapers)
JEL-codes: C32 E23 E32 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2021-08-06
New Economics Papers: this item is included in nep-cwa, nep-dge, nep-isf and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Related works:
Working Paper: The Transmission of Keynesian Supply Shocks (2021)
Working Paper: The Transmission of Keynesian Supply Shocks (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0934

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