Propagation of shocks in an input-output economy: Evidence from disaggregated prices

Using disaggregated industry-level data, this paper empirically evaluates predictions for the cross-sectional price change distribution made by input-output models with sticky prices. The response of prices to shocks is found to be consistent with the price sensitivities predicted by the input-output model. Moreover, moments of the sectoral price change distribution vary over time in response to the evolution of the network structure. Finally, through a quantitative analysis, demand and supply shocks are disentangled during the pandemic period. Counterfactual analyses show that sectoral supply shocks, aggregate demand shocks and the production network structure contributed significantly to the inflation surge in 2021–2022.