Energy supply shocks’ nonlinearities on output and prices

We use a Bayesian Threshold Vector Autoregression model with sign, magnitude, and narrative restrictions to examine the nonlinear effects of energy supply shocks. Our results show that these shocks have a stronger and more persistent impact on consumer prices in high-inflation regimes, where firms raise prices in line with costs, leading to muted short-term output effects and medium-term output declines. The central bank reacts tightening rates in high-inflation regimes but lowers them in low-inflation periods to support output. These findings emphasize the importance of incorporating state-dependence in DSGE models to capture price dynamics more accurately.