Abstract
Modern macroeconomic theories were unable to foresee the last Great Recession and could neither predict its prolonged duration nor the recovery rate. They are based on supply−demand equilibria that do not exist during recessionary shocks. Here we focus on resilience as a nonequilibrium property of networked production systems and develop a linear response theory for input−output economics. By calibrating the framework to data from 56 industrial sectors in 43 countries between 2000 and 2014, we find that the susceptibility of individual industrial sectors to economic shocks varies greatly across countries, sectors, and time. We show that susceptibility-based growth predictions that take sector- and country-specific recovery into account, outperform—by far—standard econometric models. Our results are analytically rigorous, empirically testable, and flexible enough to address policy-relevant scenarios. We illustrate the latter by estimating the impact of recently imposed tariffs on US imports (steel and aluminum) on specific sectors across European countries.
Highlights
Modern macroeconomic theories were unable to foresee the last Great Recession and could neither predict its prolonged duration nor the recovery rate
General equilibrium theory holds that economic growth is characterized by a balance of demand and supply which results in prices that signal an overall equilibrium[10,11,12]
Instead of studying the relaxation dynamics of macroeconomic variables within highly stylized vector autoregressive (VAR) models, we focus on structural characteristics of dynamical IO matrices that capture the interactions between economic sectors
Summary
Modern macroeconomic theories were unable to foresee the last Great Recession and could neither predict its prolonged duration nor the recovery rate. They are based on supply −demand equilibria that do not exist during recessionary shocks. In 2008 several advanced economies were hit by the largest recessionary shock in history[1] This Great Recession was followed by a puzzlingly slow rate of economic recovery[2]. To understand how systems in equilibrium behave in response to shocks has been successfully addressed within the framework of linear response theory (LRT)
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