A production network model for the Spanish economy with an application to the impact of NGEU funds

This paper introduces a sectoral model for the Spanish economy that allows a better understanding of the propagation of sector-specific shocks taking into account different network interdependencies. In particular, the model features sector interactions along several dimensions in an open economy setting, either in the provision of intermediate inputs and capital goods or competing in the labour market. This framework is flexible enough to provide insights into the effect of several policy-relevant shocks, such as global value chain bottlenecks, increases in production costs in energy-intensive sectors or large public investment programmes. In order to illustrate the role of such sectoral interactions, we consider a sectorisation of Next Generation EU (NGEU) funds based on Spain’s Recovery, Transformation and Resilience Plan (RTRP) which will mobilize €69.5 bn in grants. According to our findings, the average impact over a 5-year horizon is 1.15% of GDP if we consider only the direct effect of the investment programmes and expenditure plans, but it increases to 1.75% if we take into account the increase in the productive capacity of certain sectors and its propagation through the production network. Moreover, the resulting expansion is particularly strong in sectors highly dependent on high-skilled labour, such as IT and professional services, which might lead to shortages of high-skilled workers, reducing the aggregate impact on GDP by 25%.