Inflation Dynamics in Production Networks

Yasuo Hirose, Munechika Katayama, Kozo Ueda and Kota Watanabe

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: This study empirically examines the differences in inflation dynamics between the US and Japan. Using a structural model of sectoral inflation, we quantify the roles of production networks, price stickiness, and structural shocks in driving these variations. Our partial equilibrium framework captures sectoral inflation as a tractable form, enabling us to estimate the model and analytically explore the channels through which pass-through to inflation operates. The model can generate inflation persistence across sectors through production networks, further reinforced by price stickiness within each sector. The full-information Bayesian estimation results reveal that impulse response functions to sectoral shocks are similar between the two countries but that differences in inflation dynamics arise from two factors: the different sources of specific sectoral inflation, particularly in an energy-related sector, and contrasting price-setting behaviors. US firms tend to change prices in the same direction as import price shocks, leading to higher pass-through, whereas Japanese firms are inclined to set prices to absorb import price shocks. Policy experiments based on the estimated model demonstrate that a 10% increase in tariffs results in a 0.6–1.2% rise in US producer price inflation.

Keywords: inflation dynamics; production networks; input-output linkages; price stickiness (search for similar items in EconPapers)
JEL-codes: E3 (search for similar items in EconPapers)
Pages: 79 pages
Date: 2025-04
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2025-22

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