Sectoral versus Aggregate Shocks: a Structural Dynamic Factor Analysis of Inflation

Any modern economy is characterized by an interlinked production architecture in which sectors intimately rely on each other for their input requirements. Such an interlocked network of sectors provides a channel over which inflationary shocks to individual sectors propagate toother sectors in the economy. In this research project we provide a systematic quantification of the role of input-output linkages as a mechanism for propagation and amplification ofinflationary shocks to individual sectors. More precisely, we investigate the ability of micro-level (sector-level) inflation shocks to propagate throughout the production network of the economy and cause inflation of the aggregate producer price index. Insight into the microeconomie origins of aggregate inflation dynamics is important for e.g.: 1. inflation forecasting 2. optimal monetary policy 3.different structural modelsof the economy. Moreover, understanding how sectorlevel price developments (e.g. due to regulatory changesjtax shifts/etc.) cause movements in aggregate inflation dynamics is, at least in part, important to understand the observed divergence of the aggregate Belgian inflation rate from the Eurozone average.