The role of substitution elasticity in Domar aggregation

Satoshi Nakano and Kazuhiko Nishimura

Papers from arXiv.org

Abstract: The economy-wide production network, i.e., the monetary input-output coefficients, will no longer be stable against the general equilibrium propagation of sectoral productivity shocks, when the substitution elasticities of sectoral production are nonneutral. The associated network transformation hence renders nonlinearity in aggregating sectoral productivity shocks into the economy's output, i.e., Domar aggregation. In this study, we demonstrate the possibility of production networks being transformed into a singular one. We also explore the conditions under which the productivity shocks experience synergism in Domar aggregation.

Date: 2024-04, Revised 2025-02
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