Production Networks and Inflation Spillovers

Abstract

This paper investigates the relationship between input-output networks and the transmission of inflation shocks across manufacturing industries in South Korea, an economy that is open to external shocks. Using the dynamic inflation connectedness measures for 1971-2020, we show that production networks are responsible for the amplification of inflation shocks during times of supply shocks, such as the oil price shocks of 1973-74 and 1979-80. On the contrary, production networks are weakly associated with inflation transmission across sectors if the shocks originate from the demand-side such as the East Asian Financial Crisis of 1997.

Keywords: inflation, input-output, production, network, connectedness,vector autoregression, variance decomposition.

JEL Classification: E3, D57