The Transmission of Shocks across Sectors and the Dynamics of Sectoral Prices

Francesca Monti and Leila Van Keirsbilck

No 20621, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper explores the dynamics of U.S. sectoral producer prices in a large Bayesian vector autoregressive (BVAR) model where information from the Input-Output (IO) matrix is used to structure the long-run relationships between these time series. The forecasts of headline inflation generated with this model have accuracy comparable to those from the Survey of Professional Forecasters (SPF) 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 analyze the effects of different types of shocks on sectoral prices and aggregate inflation, identified using instrumental variables, and trace the cascade effects through which sectoral shocks propagate along the pricing chain, finding substantial heterogeneity in both adjustment dynamics and sectoral contributions. The analysis of the propagation of an aggregate shock like monetary policy through the network of sectors instead sheds light on the importance of each sector in the transmission of the monetary policy shock.

Keywords: Bayesian vector autoregression; Input-output linkages; Modelling producer prices (search for similar items in EconPapers)
JEL-codes: C52 E37 (search for similar items in EconPapers)
Date: 2025-09
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