Reallocation Dynamics in Production Networks With Heterogeneous Elasticities

This paper investigates the role of heterogeneous elasticities of substitution in the US production network in the transmission of supply shocks. We develop and estimate a multi-industry general equilibrium model featuring heterogeneous elasticities of substitution in input demands. Using quarterly data on 15 US industries, we provide novel econometric evidence of a relatively large dispersion in input-substitution elasticities across US industries that are in general larger than those previously found in the literature. At the industry level, this heterogeneity enriches the propagation patterns of idiosyncratic shocks and amplifies their impact on the supplying industry. At the macro level, heterogeneity in elasticities generates greater output volatility, in particular during US recessions, entailing a higher welfare cost of fluctuations