Sectoral Transmission and Aggregate Effects of Imported Inflation: An Econometric Input-Output Model for the Federal Republic of Germany

Summary

The purpose of this project was threefold: first, to develop an adequate econometric input-output model for the FRG; second, to investigate with this model into the transmission and effects of import-price shocks; third, to prove the necessity of sectorally disaggregated methods of analysis.

The model, based mainly on empirical estimates of behavioural equations, determines all domestic sectors’ production from the demand side (including production of intermediate inputs), where shifts in relative price may induce substitutions between domestic sectors as well as between domestic productions and imports. Simultaneously, prices of those productions are determined by mark-ups over endogenously determined costs of production, with mark-ups being influenced by market (capacity) considerations.

A set of alternative import-price shocks makes clear that price increases and negative volume effects are transmitted predominantly by the “basic and production goods” producing sector. Those negative impulses may be offset by expansionary effects from sectors under considerable international competition (in Germany the “capital goods and export sector”), where — given the assumptions that the import-price shocks have effects on Germany’s trading partners as well — favourable price shifts may bring about gains in market shares and rising production. These expansionary effects in one sector may spill over into other sectors via inter-industry input-output relations so that, in an extreme case, an import-price shock might finally result in higher productions and real incomes throughout the economy. In less extreme cases, we would find higher paths of all relevant price indices and lower paths of sectoral and aggregate production figures.

This paper reports on the development and findings of a research project on sectoral price structures sponsored by the Deutsche Forschungsgemeinschaft within the framework of its research program “Inflation and Employment in Open Economies”. The paper was presented at the “Eighth International Conference on InputOutput-Techniques”, Sapporo, Japan, 28 July -2 August 1986.