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

TL;DR

This paper analyzes how supply and demand shocks from Covid-19 propagate through economic input-output networks in Germany, Italy, and Spain, highlighting the importance of input bottlenecks and network structure in economic impact predictions.

Contribution

It introduces a model that accounts for simultaneous supply and demand constraints and examines shock propagation with different rationing rules, providing new insights into economic disruptions during crises.

Findings

Network effects amplify initial shocks significantly.

Input bottlenecks and rationing rules critically influence economic impact.

Initial shock size and network density are key predictors of outcomes.

Abstract

Natural and anthropogenic disasters frequently affect both the supply and demand side 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.