Discussion paper

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

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.

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Citation

Baqaee, D and E Farhi (eds) (2021), “DP15664 Keynesian Production Networks and the Covid-19 Crisis: A Simple Benchmark”, CEPR Press Discussion Paper No. 15664. https://cepr.org/publications/dp15664