Input – output network structure and shock propagation
Morozov Y.
Input – output linkages affect how supply and demand shocks spread through the economy and ultimately influence macroeconomic indicators. This paper uses an adapted multisectoral New Keynesian model to explore theoretically how shocks propagate within corner cases of input – output network types. The paper also contributes to the literature by examining how final consumption shares and industrial specialization influence the intensity of technological shocks. The findings show that various intersectoral structures lead to distinct macroeconomic responses to technology shocks; the interplay between the productivity effect and the nominal wage growth effect can either produce or eliminate the cascade amplification effect in downstream sectors. The impact of demand shocks is determined by the slope of the consumer-price Phillips curve, which itself depends on input – output network type. This slope was steepest in the horizontal economy (the most pro – inflationary effect of demand shocks) and flattest in the roundabout economy with sticky wages. Additionally, as the sector’s final consumption share increases, productivity shocks in it cause a stronger response in macroeconomic variables. Productivity shocks in sectors specializing in final goods always provoke greater reactions than those in sectors specializing in intermediate goods, regardless of the level of final sector dependence.