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

David Baqaee and Emmanuel Farhi

No 28346, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The Covid-19 crisis is an unusual and seemingly all-encompassing economic shock. On the one hand, it was unquestionably a negative demand shock that, for fixed prices and incomes, reduced household spending. On the other hand, it was also unquestionably a negative supply shock that reduced firms' ability to maintain production at pre-pandemic prices and quantities. These negative shocks affected different industries differently: whereas some producers easily switched to remote-work and maintained both employment and production, industries that required face-to-face contact were forced to reduce production capacity and employment. We consider a stripped-down version of the model presented in Baqaee and Farhi (2020). Despite its simplicity, the model nevertheless allows for an arbitrary input-output network, complementarities in both consumption and production, incomplete markets, downward nominal wage rigidity, and a zero-lower bound. In this sense, it contains many of the ingredients typically considered to be important for understanding the economic fallout from Covid-19. Nevertheless, despite allowing for these realistic ingredients, this model has a stark property: factor income shares at the initial equilibrium are global sufficient statistics for the input-output network. This article clarifies clarifies what ingredients must be added to a model if the production network is to play an important role in the propagation of shocks.

JEL-codes: E0 E24 E3 E4 E5 (search for similar items in EconPapers)
Date: 2021-01
New Economics Papers: this item is included in nep-mac and nep-net
Note: EFG ME
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Citations: View citations in EconPapers (6)

Published as David Baqaee & Emmanuel Farhi, 2021. "Keynesian Production Networks and the COVID-19 Crisis: A Simple Benchmark," AEA Papers and Proceedings, American Economic Association, vol. 111, pages 272-276, May.

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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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