Input-output linkages and the propagation of domestic productivity shocks: assessing alternative theories with stochastic simulation

ABSTRACT: Relatively small sectoral productivity shocks could lead to sizable macroeconomic variability. Whereas most contributions in the literature analyze the issue of aggregate sensitivity using simple general equilibrium models, a novel approach is proposed in this paper, based on stochastic simulations with a global computable general equilibrium model. We find that the variability of the GDP, induced by sectoral shocks, is basically determined by the degree of industrial concentration as measured by the Herfindahl index of industrial value added. The degree of centrality in inter-industrial connectivity, measured by the standard deviation of second-order degrees, is mildly significant, but it is also correlated with the industrial concentration index. After controlling for the correlation effect, we find that connectivity turns out to be statistically significant, although less so than granularity.