Nonlinear Production Networks with an Application to the Covid-19 Crisis

By D. Baqaee, Emmanuel Farhi. Social Science Research Network, 2020

117 citations recorded by the source corpus.

We study the effects of negative supply shocks and shocks to the composition of final demand on aggregate output in a disaggregated neoclassical model with multiple sectors, factors, and input-output linkages. We show how nonlinearities associated with complementarities in consumption and production amplify the effect of negative supply shocks by creating supply bottlenecks and disrupting supply chain networks. These nonlinearities are particularly potent when the shocks are more heterogeneous as the worst-affected sectors drag down the other sectors. Nonlinearities are strengthened when changes in preferences lead households to tilt the composition of their demand towards the crippled sectors directly and indirectly through their supply chains. And nonlinearities are further intensified when factors cannot easily be reallocated across sectors to reinforce weak links. A quantitative investigation suggests that nonlinearities may amplify the impact of the Covid-19 shock by between 10\%-100\%, depending on the horizon of analysis and the exact size of the shocks.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/0d044781a1016dc1a965af5a8fca5f2b65e70fdc

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Citations in the corpus

A counterfactual economic analysis of Covid-19 using a threshold augmented multi-country model (2020, methodology): “Bonadio et al. (2020) study the impact of Covid-19 on output growth in 64 countries and investigate the contribution of global supply chains to these adverse effects. Ludvigson et al. (2020) quantify the macroeconomic impact of Covid-19 in the United States using a VAR framework and a gauge of the m”
Firm-Level Exposure to Epidemic Diseases: Covid-19, SARS, and H1N1 (2020, unknown): “In a related study, Baqaee and Farhi (2020) focus on complementarity, as opposed to substitutability (Guerrieri et al.”
Supply and Demand in Disaggregated Keynesian Economies with an Application to the Covid-19 Crisis (2020, background): “…Baqaee (2015), studying the effect of shocks to the composition of demand in a production network with downward wage rigidity, Baqaee (2018) and Baqaee and Farhi (2020a), studying the effects of entry and exit in production networks, Baqaee and Farhi (2019), studying the effects of…”