Keynesian Production Networks and the Covid-19 Crisis: A Simple Benchmark

David Baqaee and Emmanuel Farhi

No 15664, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 (search for similar items in EconPapers)
JEL-codes: E0 E1 E4 (search for similar items in EconPapers)
Date: 2021-01
New Economics Papers: this item is included in nep-int, nep-mac and nep-net
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Citations: View citations in EconPapers (6)

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Journal Article: Keynesian Production Networks and the COVID-19 Crisis: A Simple Benchmark (2021)
Working Paper: Keynesian Production Networks and the Covid-19 Crisis: A Simple Benchmark (2021)
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