The Impact of the Cross-Sectoral Economic Structure on the Properties of DSGE Models

This paper discusses how cross-sectoral interactions may be taken into account in dynamic stochastic general equilibrium models – an approach borrowed from the literature on computable general equilibrium models. We explore three versions of the model subject to the number of sectors of intermediate goods production: a one-sector model, a three-sector model (mining, manufacturing, and services) without cross-sectoral interactions, and a three-sector model with cross-sectoral interactions where firms in one industry consume the products of others. The model was calibrated with the help of the 2019 supply and use tables for Russia. Our comparative analysis shows that the addition of the cross-sectoral structure results in the emergence of new transmission channels through which the shocks feed into the economy. Changes in relative prices following an emerging industrial shock can have a strong bearing on gross value added and output as well as on imports and inflation. Also, the analysis findings are markedly affected by the limitation on the mobility of production factors. In the case of perfect mobility, the adjustment of production involves changing physical volumes, while in the case of low mobility or its absence adjustment materialises as price effects, entailing a change in the response of the simulated economy to shocks.