Discussion Paper Details

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Title: Intersectoral linkages: Good shocks, bad outcomes?

Author(s): Kristian Behrens, Sergey Kichko and Philip Ushchev

Publication Date: August 2019

Keyword(s): Complementarity, Intersectoral linkages, Sectoral Shocks, Substitutability and welfare changes

Programme Area(s): International Trade and Regional Economics

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.

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Bibliographic Reference

Behrens, K, Kichko, S and Ushchev, P. 2019. 'Intersectoral linkages: Good shocks, bad outcomes?'. London, Centre for Economic Policy Research.