Working Paper: CEPR ID: DP15664
Authors: David Rezza Baqaee; Emmanuel Farhi
Abstract: How do supply and demand shocks, like the ones caused by Covid-19, interact with complex production networks? In this note, we consider a stripped-down version of the model presented in Baqaee and Farhi (2020). Despite its simplicity, the model we present allows for an arbitrary input-output network, complementarities in both consumption and production, incomplete markets, downward nominal wage rigidity, and a zero-lower bound on interest rates. Nevertheless, despite allowing for these realistic ingredients, this model has a very stark property: namely, factor income shares at the initial equilibrium are global sufficient statistics for the input-output network. This irrelevance result clarifies what assumptions must be broken if the production network is to play a role in shock propagation.
Keywords: COVID-19; supply chains; production networks; irrelevance; complementarities; downward wage rigidity
JEL Codes: E0; E4; E1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| initial factor income shares (D33) | welfare response to shocks (I38) |
| initial factor income shares (D33) | inflation response to shocks (E31) |
| initial factor income shares (D33) | sectoral employment response to shocks (J68) |
| initial factor income shares (D33) | response of welfare, inflation, and sectoral employment to shocks (H53) |
| production network structure (D85) | outcomes of welfare and employment (I38) |
| economy without intermediates (P19) | economy with intermediates (E10) |