Probabilistic input-output analysis: Modeling directions

Abstract

Recent developments in probabilistic input-output modeling based on the full-distribution approach demonstrate the relationship between distributional forms of industry aggregates and regionally variant production characteristics. Variables such as market structure, establishment size, prices, labor productivity, technology, product mix, and ages of capital stock, all of which vary regionally, are determinants of the probabilistic structure of interindustry interaction. Two modeling directions are described in this paper. The first concerns formalizing the relationship between key variables at the regional level and particular forms of associated aggregate distributions. Once these relationships are specified, the dynamic character of interindustry structure can be developed. The second modeling direction follows on the first, and concerns the more general implications of the probabilistic perspective for regional economic modeling. One model demonstrated generates a nonlinear output growth path from a linear base-point projection of final demand. This model places the regional cyclical stability issue in a new light, and establishes a method for generating interval estimates of regional economic performance for forecasting purposes.