Economic resilience from input-output susceptibility improves predictions of economic growth and recovery

TL;DR

This paper introduces a linear response theory for input-output economics that measures sector susceptibility to shocks, enabling more accurate predictions of economic growth and recovery than traditional models.

Contribution

It develops a novel susceptibility-based framework for input-output networks, improving economic shock predictions and policy scenario analysis.

Findings

Susceptibility varies greatly across sectors, countries, and time.

Susceptibility-based predictions outperform standard econometric models.

Framework is empirically calibrated and policy-relevant.

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 predictions that take sector- and country-specific recovery into account, outperform--by far--standard econometric growth-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.