DP15664 Keynesian Production Networks and the Covid-19 Crisis: A Simple Benchmark

Author(s): David Rezza Baqaee, Emmanuel Farhi
Publication Date: January 2021
Keyword(s): complementarities, COVID-19, Downward wage rigidity, irrelevance, production networks, Supply Chains
JEL(s): E0, E1, E4
Programme Areas: Monetary Economics and Fluctuations, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15664

How do supply and demand shocks, like the ones caused by Covid-19, interact with complex production networks? In this note, we consider a stripped-down version of the model presented in Baqaee and Farhi (2020). Despite its simplicity, the model we present allows for an arbitrary input-output network, complementarities in both consumption and production, incomplete markets, downward nominal wage rigidity, and a zero-lower bound on interest rates. Nevertheless, despite allowing for these realistic ingredients, this model has a very stark property: namely, factor income shares at the initial equilibrium are global sufficient statistics for the input-output network. This irrelevance result clarifies what assumptions must be broken if the production network is to play a role in shock propagation.