Working Paper: CEPR ID: DP16430
Authors: Ambrogio Cesabianchi; Andrea Ferrero
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.
Keywords: sectoral shocks; input-output network
JEL Codes: C11; C32; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| sectoral supply shocks (F41) | shortages in aggregate demand (E00) |
| sectoral supply shocks (F41) | aggregate demand shocks (E00) |
| strong sectoral complementarities (F12) | shortages in aggregate demand (E00) |
| sectoral loadings (R15) | prices increase when output falls (E31) |
| degree of sectoral interconnection (F02) | strength of Keynesian supply mechanism (E12) |
| price stickiness (L11) | strength of Keynesian supply mechanism (E12) |