Working Paper: NBER ID: w28178
Authors: Ernest Liu; Aleh Tsyvinski
Abstract: We associate a dynamical system with input-output networks and study its spectral properties. Specifically, we develop a dynamic production network model featuring adjustment costs of changing inputs and thus gradual recovery from temporary TFP shocks. First, we explicitly solve for the output and welfare effects of temporary shocks. We show shocks to sectors that generate significant sales through distant linkages to the consumer are most damaging. Second, we eigendecompose the input-output matrix and show, because higher-order linkages take longer to recover, fewer eigenvectors are needed to represent the welfare impact of sectoral shocks in the dynamic economy compared to the Domar weights. Third, we analyze the U.S. input-output structure and show the welfare impact of temporary shocks has a low-dimensional, 4-factor structure (out of 171 eigenvectors). Finally, we revisit the historical use of input-output analysis in target selection for bombing Nazi Germany and Imperial Japan during WWII.
Keywords: No keywords provided
JEL Codes: E0; E23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| shocks to sectors (E32) | economic welfare (D69) |
| sectoral shocks (F41) | recovery dynamics (C69) |
| adjustment costs (J30) | recovery speed (C22) |
| recovery speed (C22) | welfare outcomes (I38) |
| temporary shocks (E32) | welfare impact (D69) |
| elasticity of welfare to TFP shocks (D69) | difference between sectoral Domar weights (C69) |