The Transmission of Keynesian Supply Shocks

Andrea Ferrero and Ambrogio Cesa-Bianchi

No 16430, CEPR Discussion Papers from Centre for Economic Policy Research

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 3-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: Sectoral shocks; Input-output network (search for similar items in EconPapers)
JEL-codes: C11 C32 E32 (search for similar items in EconPapers)
Date: 2021-08
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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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