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Beware of large shocks! A non-parametric structural inflation model

Author

Listed:
  • Bobeica, Elena
  • Holton, Sarah
  • Huber, Florian
  • Martínez Hernández, Catalina

Abstract

We propose a novel empirical structural inflation model that captures non-linear shock transmission using a Bayesian machine learning framework that combines VARs with non-linear structural factor models. Unlike traditional linear models, our approach allows for non-linear effects at all impulse response horizons. Identification is achieved via sign, zero, and magnitude restrictions within the factor model. Applying our method to euro area energy shocks, we find that inflation reacts disproportionately to large shocks, while small shocks trigger no significant response. These non-linearities are present along the pricing chain, more pronounced upstream and gradually attenuating downstream. JEL Classification: E31, C32, C38, Q43

Suggested Citation

  • Bobeica, Elena & Holton, Sarah & Huber, Florian & Martínez Hernández, Catalina, 2025. "Beware of large shocks! A non-parametric structural inflation model," Working Paper Series 3052, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20253052
    Note: 2382002
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    References listed on IDEAS

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    More about this item

    Keywords

    energy; euro area; inflation; machine learning; non-linear model;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • 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
    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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