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A Dynamic Model of Input–Output Networks

Author

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  • Ernest Liu
  • Aleh Tsyvinski

Abstract

We develop a dynamic model of input–output networks that incorporates adjustment costs of changing inputs. Our closed-form solution for the dynamics of the economy shows that temporary shocks to upstream sectors, whose output travels through long supply chains, have disproportionately significant welfare impact compared to affected sectors’ Domar weights. We conduct a spectral analysis of the U.S. production network and reveal that the welfare impact of temporary sectoral shocks can be represented by a low-dimensional, 3-factor structure.

Suggested Citation

  • Ernest Liu & Aleh Tsyvinski, 2024. "A Dynamic Model of Input–Output Networks," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 91(6), pages 3608-3644.
    • Handle: RePEc:oup:restud:v:91:y:2024:i:6:p:3608-3644.
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    File URL: http://hdl.handle.net/10.1093/restud/rdae012
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