Macroeconomic effects of shocks to import and services sector prices

Abstract

This paper investigates the macroeconomic implications of inflationary shocks that originate from the import and services sectors. The set-up is a medium-scale Dynamic Stochastic General Equilibrium (DSGE) model calibrated for the Greek economy. The results suggest that a temporary increase in import price inflation adversely affects economic activity and drives up domestic inflation. The largest output losses occur in the medium term, since in the short term the adverse effects are dampened by the presence of price rigidities and an import substitution effect that induces expenditure to switch towards domestically produced goods. Additionally, the findings suggest that a temporary increase in the price of the services sector exerts strong inflationary pressures and negatively affects economic activity. Finally, the results show that inflation persistence matters for the effects on the macroeconomy. The more persistent inflation is in imports and the services sector, the larger the output losses.