European Central Bank publishes research modelling pricing cascades that dampen monetary inflation but amplify supply shock swings through production networks

The European Central Bank published a working paper by Mishel Ghassibe and Anton Nakov that develops a non-linear, multi-sector model with input-output linkages and state-dependent price setting to explain large inflation episodes driven by sectoral shocks and changes in the share of firms repricing. The paper’s core result is that production networks change how “pricing cascades” propagate, dampening price adjustment after demand shocks such as monetary interventions but amplifying repricing and inflation volatility after supply shocks. In the model, large shocks move firms across menu-cost inaction thresholds, triggering extensive-margin repricing cascades. Calibrated to 39 euro area sectors, networks slow repricing after a +10% money supply shock, raising the fraction of adjusters by 0.18 versus 0.35 without linkages, and delivering larger real effects (GDP rises 0.85% after a 1% expansion with networks versus 0.78% without, and 6% after a +10% shock versus 2.5%). By contrast, networks speed repricing after supply shocks, with a -10% aggregate total factor productivity shock increasing the fraction of adjusters by 0.65 versus 0.28 without networks and generating highly non-linear inflation responses (0.59% on impact for a -1% shock versus 17% for -10%). When fed four shock series for 2019-2024 (aggregate demand, a labour-wedge process, and sectoral energy and food price shocks), the framework matches the euro area’s post-Covid rise in repricing frequency (about five percentage points) and the inflation peak (around 11%), while model variants without networks or with time-dependent pricing materially underpredict these dynamics.