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The transmission of Keynesian supply shocks

Author

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  • Ambrogio Cesa-Bianchi

    (Bank of England)

  • Andrea Ferrero

    (Bank of England)

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 three-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.

Suggested Citation

  • Ambrogio Cesa-Bianchi & Andrea Ferrero, 2021. "The transmission of Keynesian supply shocks," Bank of England Staff Working Paper series 934, Bank of England.
    • Handle: RePEc:boe:boeewp:0934
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    References listed on IDEAS

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    Cited by:

    1. Anastasiia Antonova & Mykhailo Matvieiev & Céline Poilly, 2024. "Supply Shocks in the Fog: The Role of Endogenous Uncertainty," AMSE Working Papers 2427, Aix-Marseille School of Economics, France.
    2. Chan, Jenny & Diz, Sebastian & Kanngiesser, Derrick, 2024. "Energy prices and household heterogeneity: Monetary policy in a Gas-TANK," Journal of Monetary Economics, Elsevier, vol. 147(S).
    3. Marko Mlikota, 2022. "Dynamic Innovation Transmission Through Networks: Theory, Large T-Inference, and Business Cycles by Lagged Input-Output Conversion," Papers 2211.13610, arXiv.org, revised Sep 2026.
    4. Adam, Klaus & Weber, Henning, 2026. "Monetary Policy and Supply-Side Turnover," CEPR Discussion Papers 21422, Centre for Economic Policy Research.
    5. Stefan Schiman-Vukan, 2023. "Austria's (Over)Inflation and Its Main Sources," WIFO Research Briefs 9, WIFO.
    6. Durand, Luigi & Fornero, Jorge Alberto, 2024. "Estimating the output gap in times of COVID-19," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 5(4).
    7. Andrea Cipollini & Fabio Parla, 2023. "Climate risk and investment in equities in Europe: a Panel SVAR approach," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 0093, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    8. Jean-Paul Renne & Sarah Mouabbi & Adrien Tschopp, 2026. "Inflation and Growth Risk: Balancing the Scales with Surveys," Working papers 1036, Banque de France.
    9. Matteo Ficarra & Rebecca Mari, 2025. "Weathering the storm: sectoral economic and inflationary effects of floods and the role of adaptation," Bank of England Staff Working Paper series 1120, Bank of England.
    10. Catherine L. Mann & Lennart Brandt, 2022. "On Returning Inflation to Target," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 57(2), pages 87-92, March.
    11. Machado, Caio, 2024. "Uneven recessions and optimal firm subsidies," Journal of Public Economics, Elsevier, vol. 239(C).
    12. De Graeve, Ferre & Schneider, Jan David, 2023. "Identifying sectoral shocks and their role in business cycles," Journal of Monetary Economics, Elsevier, vol. 140(C), pages 124-141.

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    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
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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