Productivity propagation with networks transformation

Abstract

We model sectoral production by cascading binary compounding processes. The sequence of processes is discovered in a self-similar hierarchical structure stylized in the economy-wide networks of production. All substitution elasticities and Hicks-neutral productivity growth are calibrated so that the general equilibrium feedbacks between all sectoral unit cost functions replicate the transformation of networks observed as a set of two temporally distant input-output coefficient matrices. This system of unit cost functions is then examined to study how idiosyncratic sectoral productivity shocks propagate into aggregate macroeconomic fluctuations in light of potential networks transformation. Additionally, we study how sectoral productivity increments propagate into the dynamic general equilibrium, thereby allowing networks transformation and ultimately producing social benefits.