Restoration and extrapolation of structural transformation by dynamical general equilibrium feedbacks

TL;DR

This paper develops a dynamic general equilibrium model with hierarchical sectoral processes and feedbacks, enabling the extrapolation of structural transformations and welfare impacts from sectoral productivity shocks.

Contribution

It introduces a novel hierarchical modeling approach with recursive CES parameters and feedback systems to analyze structural changes and welfare effects.

Findings

Successfully replicates historical cost share structures

Extrapolates potential structural transformations due to productivity shocks

Quantifies welfare changes associated with sectoral productivity improvements

Abstract

We model sectoral production by serially nesting (cascading) binary compounding processes. The sequence of processes is discovered in a self-similar hierarchical structure stylized in macroscopic input-output transactions. The feedback system of unit cost functions, with recursively estimated nest-wise CES parameters, is calibrated for sectoral productivities to replicate two temporally distant cost share structures, observed in a set of linked input--output tables. We model representative households by multifactor CES, with parameters estimated by fixed effects regressions. By the integrated dynamic general equilibrium model, we extrapolate potential structural transformations, and measure the associated welfare changes, caused by exogenous sectoral productivity shocks.