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The transmission of shocks across sectors and the dynamics of sectoral prices

Author

Listed:
  • Monti, Francesca

    (Université catholique de Louvain, LIDAM/CORE, Belgium)

  • Van Keirsbilck, Leïla

    (Université catholique de Louvain, LIDAM/CORE, Belgium)

Abstract

This paper explores the dynamics of U.S. sectoral producer prices in a large BVAR model where the Input-Output (IO) matrix is used to structure their longrun relationships, allowing to capture flexibly the propagation of micro shocks to aggregate variables. This model’s forecasts of headline inflation have accuracy comparable to the Survey of Professional Forecasters’ and greater than those generated by a standard BVAR with Minnesota priors, confirming that the IO matrix long-run prior conveys relevant information about the data. We identify three key shocks - an oil price shock, a cereal price shock, and a monetary policy shock - using instrumental variables and find that sectoral linkages play a significant role in their transmission. Sectoral asymmetries are crucial for evaluating the macroeconomic consequences of energy price shocks, as industries with slower price adjustments amplify inflation persistence, even after the shock dissipates. And the impact of a sector-specific shock like the cereals price shock is non-negligible once the production network accounted for.

Suggested Citation

  • Monti, Francesca & Van Keirsbilck, Leïla, 2025. "The transmission of shocks across sectors and the dynamics of sectoral prices," LIDAM Discussion Papers CORE 2025014, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvco:2025014
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    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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