DP13946 Intersectoral linkages: Good shocks, bad outcomes?

Author(s): Kristian Behrens, Sergey Kichko, Philip Ushchev
Publication Date: August 2019
Keyword(s): Complementarity, Intersectoral linkages, Sectoral Shocks, Substitutability, welfare changes
JEL(s): D11, D43, D62
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13946

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.