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

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  • Baqaee, David Rezza
  • Farhi, Emmanuel

Abstract

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.

Suggested Citation

  • Baqaee, David Rezza & Farhi, Emmanuel, 2021. "Keynesian Production Networks and the Covid-19 Crisis: A Simple Benchmark," CEPR Discussion Papers 15664, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:15664
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    1. Farhi, Emmanuel & Baqaee, David Rezza, 2020. "Nonlinear Production Networks with an Application to the Covid-19 Crisis," CEPR Discussion Papers 14742, C.E.P.R. Discussion Papers.
    2. David Baqaee & Emmanuel Farhi, 2022. "Supply and Demand in Disaggregated Keynesian Economies with an Application to the COVID-19 Crisis," American Economic Review, American Economic Association, vol. 112(5), pages 1397-1436, May.
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    Cited by:

    1. Marjit, Sugata & Das, Gouranga, 2022. "Contact Intensity, Unemployment and Finite Change - The Case of Entertainment Sector under Pandemic: A General Equilibrium Approach," GLO Discussion Paper Series 1200, Global Labor Organization (GLO).
    2. Jolanta Droždz & Arūnas Burinskas & Viktorija Cohen, 2023. "The Impact of the COVID-19 Pandemic on the Revealed Comparative Advantage of Industries in the Baltic States," Economies, MDPI, vol. 11(2), pages 1-16, February.
    3. Pierre Olivier Gourinchas, 2023. "International Macroeconomics: From the Great Financial Crisis to COVID-19, and Beyond," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 71(1), pages 1-34, March.
    4. Sugata Marjit & Gouranga Gopal Das, 2021. "Contact-Intensity, Collapsing Entertainment Sector and Wage Inequality: A Finite Change Model of Covid-19 Impact," CESifo Working Paper Series 9311, CESifo.
    5. Nashwan M. A. Saif & Jianping Ruan & Bojan Obrenovic, 2021. "Sustaining Trade during COVID-19 Pandemic: Establishing a Conceptual Model Including COVID-19 Impact," Sustainability, MDPI, vol. 13(10), pages 1-20, May.
    6. Chavarín, Ricardo & Gómez, Ricardo & Salgado, Alfredo, 2023. "Sectoral supply and demand shocks during COVID-19: Evidence from Mexico," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 4(1).

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    More about this item

    Keywords

    Covid-19; Supply chains; Production networks; Irrelevance; Complementarities; Downward wage rigidity;
    All these keywords.

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models

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