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Energy supply shocks’ nonlinearities on output and prices

Author

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  • De Santis, Roberto A.
  • Tornese, Tommaso

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.

Suggested Citation

  • De Santis, Roberto A. & Tornese, Tommaso, 2025. "Energy supply shocks’ nonlinearities on output and prices," European Economic Review, Elsevier, vol. 176(C).
    • Handle: RePEc:eee:eecrev:v:176:y:2025:i:c:s001429212500087x
    DOI: 10.1016/j.euroecorev.2025.105037
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    More about this item

    Keywords

    Business cycles; Energy shocks; Non-linearities; TVAR; Narrative identification;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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