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The Transmission of Keynesian Supply Shocks

Author

Listed:
  • Ambrogio Cesa-Bianchi

    (Bank of England
    Centre for Macroeconomics (CFM)
    Centre for Economic Policy Research (CEPR))

  • Andrea Ferrero

    (University of Oxford
    Centre for Macroeconomics (CFM)
    Centre for Economic Policy Research (CEPR))

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 3-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," Discussion Papers 2116, Centre for Macroeconomics (CFM).
    • Handle: RePEc:cfm:wpaper:2116
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    References listed on IDEAS

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    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. 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".
    4. Machado, Caio, 2024. "Uneven recessions and optimal firm subsidies," Journal of Public Economics, Elsevier, vol. 239(C).
    5. 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.
    6. Marko Mlikota, 2022. "Cross-Sectional Dynamics Under Network Structure: Theory and Macroeconomic Applications," Papers 2211.13610, arXiv.org, revised Jan 2026.
    7. 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.
    8. 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.
    9. 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).
    10. Stefan Schiman-Vukan, 2023. "Austria's (Over)Inflation and Its Main Sources," WIFO Research Briefs 9, WIFO.

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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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