Simultaneous supply and demand constraints in input-output networks: the case of Covid-19 in Germany, Italy, and Spain

Natural and anthropogenic disasters frequently affect both the supply and demand sides of an economy. A striking recent example is the Covid-19 pandemic which has created severe disruptions to economic output in most countries. These direct shocks to supply and demand will propagate downstream and u...

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Bibliographic Details
Published in:Economic systems research 2022-07, Vol.34 (3), p.273-293
Main Authors: Pichler, Anton, Farmer, J. Doyne
Format: Article
Language:English
Subjects:
Covid-19
economic impact
economic shocks
input-output models
linear programming
production networks
rationing
shock propagation
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Summary:Natural and anthropogenic disasters frequently affect both the supply and demand sides of an economy. A striking recent example is the Covid-19 pandemic which has created severe disruptions to economic output in most countries. These direct shocks to supply and demand will propagate downstream and upstream through production networks. Given the exogenous shocks, we derive a lower bound on total shock propagation. We find that even in this best case scenario network effects substantially amplify the initial shocks. To obtain more realistic model predictions, we study the propagation of shocks bottom-up by imposing different rationing rules on industries if they are not able to satisfy incoming demand. Our results show that economic impacts depend strongly on the emergence of input bottlenecks, making the rationing assumption a key variable in predicting adverse economic impacts. We further establish that the magnitude of initial shocks and network density heavily influence model predictions.
ISSN:0953-5314
1469-5758
DOI:10.1080/09535314.2021.1926934