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Supply and demand biases in linear interindustry models

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  • Manresa, Antonio
  • Sancho, Ferran

Abstract

We explore the sectoral and aggregate implications of some endogeneization rules (i.e. on value-added and final demand) which have been common in the extended demand-driven Leontief model and have been recently proposed in the supply-driven Ghosh model. Extended linear models are refinements that aim at endowing the linear models with additional general equilibrium feedbacks. We detect that these rules may give rise in these models to some allegedly pathological and biased behavior. We find that in these models sectoral or aggregate output may not follow the logical and economically expected direct relationship with some underlying endogenous variables — namely, output and value-added in the supply-driven model and output and consumption in the demand-driven model. Because of their shared mathematical structure, whatever is or seems to be pathological in the Ghosh model also has a symmetric counterpart in the Leontief model. These would not be good news for the inner consistency of these linear models and raise doubts regarding the validity of their empirical applications. To avoid such possible inconsistencies, we propose new and simple endogeneization rules that have a sound economic interpretation.

Suggested Citation

  • Manresa, Antonio & Sancho, Ferran, 2013. "Supply and demand biases in linear interindustry models," Economic Modelling, Elsevier, vol. 33(C), pages 94-100.
  • Handle: RePEc:eee:ecmode:v:33:y:2013:i:c:p:94-100
    DOI: 10.1016/j.econmod.2013.03.025
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    References listed on IDEAS

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    1. Ana-Isabel Guerra & Ferran Sancho, 2011. "A Non-Possibility Theorem For Joint-Stability In Interindustry Models," UFAE and IAE Working Papers 881.11, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
    2. Louis de Mesnard, 2009. "Is The Ghosh Model Interesting?," Journal of Regional Science, Wiley Blackwell, vol. 49(2), pages 361-372.
    3. Ana-Isabel Guerra & Ferran Sancho, 2011. "Revisiting The Original Ghosh Model: Can It Be More Plausible?," Working Papers 11.02, Universidad Pablo de Olavide, Department of Economics.
    4. Jan Oosterhaven, 2012. "Adding Supply-Driven Consumption Makes The Ghosh Model Even More Implausible," Economic Systems Research, Taylor & Francis Journals, vol. 24(1), pages 101-111, October.
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