DP13946 Intersectoral linkages: Good shocks, bad outcomes?
|Author(s):||Kristian Behrens, Sergey Kichko, Philip Ushchev|
|Publication Date:||August 2019|
|Date Revised:||September 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.