Discussion Paper Details
Please find the details for DP13946 in an easy to copy and paste format below:
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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Behrens, K, Kichko, S and Ushchev, P. 2019. 'Intersectoral linkages: Good shocks, bad outcomes?'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13946