Using Ready-Made Regional Input-Output Models to Estimate Backward-Linkage Effects of Exogenous Output Shocks

Scott R Steinback

doi:10.52324/001c.8369

Abstract

The Leontief input-output model provides the basis for quantifying backward-linked multiplier effects of exogenous final demand shocks. In certain situations, however, policies or uncontrollable factors induce exogenous changes in gross industry output. Application of the usual Leontief multipliers in these cases will lead to biased calculations of backward-linked economy-wide effects. To eliminate this bias, an output-based adjustment method is proposed that relates demand-driven Leontief multipliers to exogenous output shocks. It is demonstrated that this approach yields exactly the same results as the mixed exogenous/endogenous variables technique, a commonly employed adaptation procedure that accepts outputs as entries. The equivalence between these two approaches is important because the output-based approach offers substantial computational savings through ease of implementation within ready-made regional input-output systems and provides practitioners with the ability to generate disaggregated estimates of indirect multiplier effects.

Highlights

The Leontief input-output model, which accounts for both direct economic effects and backward-linked multiplier effects, provides a convenient framework for quantifying the short-run economy-wide effects of final demand shocks
Application of the usual Leontief multipliers in such a case will lead to biased calculations of backward-linked economy-wide effects because the level of sectoral output is not determined by demand but by capacity constraints
In an attempt to provide a higher level of sectoral detail and to minimize computational complexity, it will be demonstrated that with adjustments to the regional purchase coefficients, standard Leontief techniques can be employed within ready-made inputoutput models to translate predetermined output shocks into backward-linked economywide effects

Summary

INTRODUCTION

The Leontief input-output model, which accounts for both direct economic effects and backward-linked multiplier effects, provides a convenient framework for quantifying the short-run economy-wide effects of final demand shocks. In an attempt to provide a higher level of sectoral detail and to minimize computational complexity, it will be demonstrated that with adjustments to the regional purchase coefficients, standard Leontief techniques can be employed within ready-made inputoutput models to translate predetermined output shocks into backward-linked economywide effects This output-based adjustment approach yields exactly the same aggregate solution as the mixed exogenous/endogenous variables technique; but since it takes advantage of the sectoral detail inherent in ready-made input-output models, it provides disaggregated estimates of indirect multiplier effects.

OVERESTIMATION OF ENDOGENOUS EFFECTS

OUTPUT-BASED ADJUSTMENT MODEL

CONCLUSIONS