Modeling simultaneous supply and demand shocks in input-output networks

Anton Pichler and J. Farmer

INET Oxford Working Papers from Institute for New Economic Thinking at the Oxford Martin School, University of Oxford

Abstract: Natural and anthropogenic disasters frequently affect both the supply and demand side of an economy. A striking recent example is the Cover-19 pandemic which has created severe industry-specific disruptions to economic output in most countries. Since firms are embedded in production networks, these direct shocks to supply and demand will propagate downstream and upstream. We show that existing input-output models which allow for binding demand and supply constraints yield infeasible solutions when applied to pandemic shocks of three major European countries (Germany, Italy, Spain). We then introduce a mathematical optimisation procedure which is able to determine best-case feasible market allocations, giving a lower bound on total shock propagation. We find that even in this best-case scenario network effects substantially amplify the initial shocks. To obtain more realistic model predictions, we study the propagation of shocks bottom-up by imposing different rationing rules on firms if they are not able to satisfy the emergence of input bottlenecks, making the rationing assumption a key variable in predicting adverse economic impacts. We further establish that the magnitude of initial shocks and network density heavily influence model predictions.

Keywords: Covid-19; production networks; input-output models; rationing; linear programming; economic shocks; shock propagation; economic impact (search for similar items in EconPapers)
JEL-codes: C61 C67 D57 E23 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2021-01
New Economics Papers: this item is included in nep-eec, nep-isf, nep-mac and nep-net
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:amz:wpaper:2021-05

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