Discussion paper

DP13946 Intersectoral linkages: Good shocks, bad outcomes?

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.


Behrens, K, S Kichko and P Ushchev (2019), ‘DP13946 Intersectoral linkages: Good shocks, bad outcomes?‘, CEPR Discussion Paper No. 13946. CEPR Press, Paris & London. https://cepr.org/publications/dp13946