Heterogeneous Inflation Volatility in Production Networks: Producer vs. Consumer Prices
60 Pages Posted: 4 Nov 2024
Date Written: September 26, 2024
Abstract
We investigate the sources of heterogeneity in producer and consumer price inflation rates at both industry and aggregate levels. To this end, we develop a dynamic general equilibrium model with a production network, allowing us to disentangle the effects of producer price stickiness and consumer price stickiness in the transmission of sectoral shocks, a distinction often overlooked in theoretical models. We demonstrate that sectoral cost-push shocks and network connectivity play crucial roles in explaining the relative volatility between producer and consumer price inflation in the U.S. Additionally, we quantify how these sectoral cost-push shocks propagate through cascading changes in producer prices, ultimately influencing the aggregate consumer price.
Keywords: Cost-push shock, inflation volatility, pass-through, production networks
JEL Classification: E31, E32
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