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Distortions and the Structure of the World Economy

Author

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  • Lorenzo Caliendo
  • Fernando Parro
  • Aleh Tsyvinski

Abstract

We develop a model of the world economy as input-output relationships subject to distortions. We then propose a methodology to solve the identification problem, common to the literature on misallocation in input-output relationships, of separating sectoral TFPs from the sectoral distortions. Using both the input shares and the consumption shares within the CES production and CES consumption structure we derive simple closed-form sufficient statistics for the sectoral distortions and for the sectoral TFPs. We then derive a closed-form solution of the elasticities of each entry in the world input-output matrix to distortions. We compute a total of more than half a million internal distortions and TFPs and document significant heterogeneity of those across countries and sectors. We then calculate the whole matrix of about two million elasticities to distortions and TFPs of the input-output matrix of the world economy. We show that internal (within a given country) distortions significantly affect the structure of the economy of that country and have sizeable cross effects on the input-output matrix of other countries. We then find that the world GDP elasticity to changes in internal distortions is an order of magnitude larger than that of the external distortions.

Suggested Citation

  • Lorenzo Caliendo & Fernando Parro & Aleh Tsyvinski, 2017. "Distortions and the Structure of the World Economy," NBER Working Papers 23332, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:23332
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • C67 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Input-Output Models
    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • F00 - International Economics - - General - - - General
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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