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The Transmission of Keynesian Supply Shocks

Speaker: Ambrogio Cesa-Bianchi, Bank of England

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 be the result of sectoral supply shocks that spillover to other sectors via a Keynesian supply mechanism. This finding is not only a feature of the Covid episode but a regular feature of the data in general. Understanding the origins of business cycle fluctuations requires breaking the dichotomy between aggregate demand and supply disturbances.