Energy supply shocks’ nonlinearities on output and prices

Roberto A. De Santis and Tommaso Tornese

European Economic Review, 2025, vol. 176, issue C

Abstract: We use a Bayesian Threshold Vector Autoregression model with sign, magnitude, and narrative restrictions to examine the nonlinear effects of energy supply shocks. Our results show that these shocks have a stronger and more persistent impact on consumer prices in high-inflation regimes, where firms raise prices in line with costs, leading to muted short-term output effects and medium-term output declines. The central bank reacts tightening rates in high-inflation regimes but lowers them in low-inflation periods to support output. These findings emphasize the importance of incorporating state-dependence in DSGE models to capture price dynamics more accurately.

Keywords: Business cycles; Energy shocks; Non-linearities; TVAR; Narrative identification (search for similar items in EconPapers)
JEL-codes: C32 E32 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:176:y:2025:i:c:s001429212500087x

DOI: 10.1016/j.euroecorev.2025.105037

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