The transmission of shocks across sectors and the dynamics of sectoral prices

Francesca Monti and Leïla Van Keirsbilck
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Francesca Monti: Université catholique de Louvain, LIDAM/CORE, Belgium
Leïla Van Keirsbilck: Université catholique de Louvain, LIDAM/CORE, Belgium

No 2025014, LIDAM Discussion Papers CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: This paper explores the dynamics of U.S. sectoral producer prices in a large BVAR model where the Input-Output (IO) matrix is used to structure their longrun relationships, allowing to capture flexibly the propagation of micro shocks to aggregate variables. This model’s forecasts of headline inflation have accuracy comparable to the Survey of Professional Forecasters’ and greater than those generated by a standard BVAR with Minnesota priors, confirming that the IO matrix long-run prior conveys relevant information about the data. We identify three key shocks - an oil price shock, a cereal price shock, and a monetary policy shock - using instrumental variables and find that sectoral linkages play a significant role in their transmission. Sectoral asymmetries are crucial for evaluating the macroeconomic consequences of energy price shocks, as industries with slower price adjustments amplify inflation persistence, even after the shock dissipates. And the impact of a sector-specific shock like the cereals price shock is non-negligible once the production network accounted for.

Keywords: BVAR; production networks; sectoral shocks (search for similar items in EconPapers)
JEL-codes: C11 C55 E30 (search for similar items in EconPapers)
Pages: 51
Date: 2025-09-23
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