Relative-Price Changes as Aggregate Supply Shocks Revisited: Theory and Evidence

Hassan Afrouzi, Saroj Bhattarai and Edson Wu

No 32816, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We provide theory and evidence that relative price shocks can cause aggregate inflation and act as aggregate supply shocks. Empirically, we show that exogenous positive energy price shocks have a positive impact not only on headline but also on U.S. core inflation while depressing U.S. real activity. In a two-sector monetary model with upstream and downstream sectors and heterogeneous price stickiness, we analytically characterize how upstream shocks propagate to prices. Using panel IV local projections, we show that the responsiveness of sectoral PCE prices to energy price shocks is in line with model predictions. Motivated by post-COVID inflation in the U.S., a model experiment shows that a one-time relative price shock generates persistent movements in headline and core inflation similar to those observed in the data, even in the absence of aggregate slack. The model also emphasizes that monetary policy stance plays an important role in propagation of such shocks.

JEL-codes: C67 E32 E52 (search for similar items in EconPapers)
Date: 2024-08
New Economics Papers: this item is included in nep-cba and nep-mon
Note: EFG ME
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Published as Hassan Afrouzi & Saroj Bhattarai & Edson Wu, 2024. "Relative-price changes as aggregate supply shocks revisited: Theory and evidence," Journal of Monetary Economics, .
Forthcoming: Relative-Price Changes as Aggregate Supply Shocks Revisited: Theory and Evidence , Hassan Afrouzi, Saroj Bhattarai, Edson Wu. in Inflation in the COVID Era and Beyond , Ball and Gorodnichenko. 2024

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