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The Transmission of Foreign Shocks in a Networked Economy

Author

Listed:
  • Pablo Aguilar

    (BANCO DE ESPAÑA AND ECB)

  • Rubén Domínguez-Díaz

    (BANCO DE ESPAÑA)

  • José-Elías Gallegos

    (BANCO DE ESPAÑA)

  • Javier Quintana

    (BANCO DE ESPAÑA)

Abstract

We analyze how production networks transmit foreign price shocks and reshape monetary policy trade-offs in an open-economy New Keynesian model with domestic and international input–output linkages. Analytically, we show that closing the output gap does not generally stabilize domestic inflation, as sector-level terms-of-trade movements and trade imbalances become additional drivers of inflation dynamics. Quantitatively, we study an international energy price shock in a model calibrated to major euro area countries and their trade partners. We find that production networks significantly amplify the cumulative headline inflation response and substantially worsen monetary policy trade-offs, as measured by the sacrifice ratio.

Suggested Citation

  • Pablo Aguilar & Rubén Domínguez-Díaz & José-Elías Gallegos & Javier Quintana, 2026. "The Transmission of Foreign Shocks in a Networked Economy," Working Papers 2607, Banco de España.
  • Handle: RePEc:bde:wpaper:2607
    DOI: https://doi.org/10.53479/42526
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    References listed on IDEAS

    as
    1. Pol Antras & Davin Chor & Thibault Fally & Russell Hillberry, 2012. "Measuring the Upstreamness of Production and Trade Flows," American Economic Review, American Economic Association, vol. 102(3), pages 412-416, May.
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    3. Enghin Atalay, 2017. "How Important Are Sectoral Shocks?," American Economic Journal: Macroeconomics, American Economic Association, vol. 9(4), pages 254-280, October.
    4. Philippe Andrade & Martin Arazi & Viacheslav Sheremirov, 2023. "The Aggregate Effects of Sectoral Shocks in an Open Economy," Working Papers 23-13, Federal Reserve Bank of Boston.
    5. Bodenstein, Martin & Erceg, Christopher J. & Guerrieri, Luca, 2008. "Optimal monetary policy with distinct core and headline inflation rates," Journal of Monetary Economics, Elsevier, vol. 55(Supplemen), pages 18-33, October.
    6. Jordi Galí & Tommaso Monacelli, 2005. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 72(3), pages 707-734.
    7. Christian Bayer & Alexander Kriwoluzky & Gernot J. Müller & Fabian Seyrich, 2023. "Hicks in HANK: Fiscal Responses to an Energy Shock," Discussion Papers of DIW Berlin 2056, DIW Berlin, German Institute for Economic Research.
    8. Auclert, Adrien & Monnery, Hugo & Rognlie, Matthew & Straub, Ludwig, 2023. "Managing an Energy Shock: Fiscal and Monetary Policy," CEPR Discussion Papers 18340, Centre for Economic Policy Research.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Ascari, Guido & Bijnens, Gert & Bobasu, Alina & Colciago, Andrea & Dhyne, Emmanuel & Elfsbacka-Schmöller, Michaela & Grimaud, Alex & Valderrama, Maria Teresa & Zlobins, Andrejs & Audzei, Volha, 2026. "Monetary policy transmission and structural changes," Occasional Paper Series 393, European Central Bank.
    2. Pablo Aguilar & Matthieu Darracq Pariès & Alistair Dieppe & Rubén Domínguez-Díaz & Antonio Eugenelo & José-Elías Gallegos & Javier Quintana, 2026. "Tariffs, production networks and spillovers: the case of a US-China trade war," Working Papers 2632, Banco de España.

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    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E70 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - General

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