Intersectoral linkages: Good shocks, bad outcomes?

Kristian Behrens, Sergey Kichko and Philip Ushchev

No 13946, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We analyze multisector models with endogenous product variety and derive general results on the magnitude of welfare changes due to sector-specific price shocks. Intersectoral linkages magnify or dampen these shocks, depending on complementarity or substitutability in consumers’ preferences. Under the widely used combination of Cobb-Douglas-CES utilities and monopolistic competition, intersectoral linkages disappear. This does not hold with more general preferences or market structures, where sector-specific price shocks that are a priori welfare improving can turn out to be welfare worsening economy-wide. We illustrate this result with several examples, in particular where one sector is ‘granular’ and the other is monopolistically competitive.

Keywords: Intersectoral linkages; Sectoral shocks; Welfare changes; Complementarity; Substitutability (search for similar items in EconPapers)
JEL-codes: D11 D43 D62 (search for similar items in EconPapers)
Date: 2019-08
New Economics Papers: this item is included in nep-com
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Citations: View citations in EconPapers (1)

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