Analysing dynamic cross-price dependencies with a Markov-Switching spatial autoregressive model

This study introduces a novel Markov-switching spatial autoregressive (MS-SAR) model to analyse dynamic cross-price interdependencies within the three-digit subcomponents of the Consumer Price Index (CPI) for 15 European Union countries. By allowing the spatial weight matrix and network strength to evolve over time, our model captures the complex, timevarying nature of economic interdependencies that traditional models often overlook. Our results reveal marked cross-country differences in the propagation of price shocks across different categories, providing valuable insights into the transmission of macroeconomic shocks, such as the recent energy price shock, to inflation dynamics.