The Dynamic Impact of Real Distortions in Production Networks

We analytically characterize the comparative statics and transitory dynamics of the macroeconomy after a one-time real distortion changes by assuming supply chain adjustment costs. We analytically decompose the comparative static effects into economic structure channel and technology channel. And supply chain adjustment costs act as buffer effects that reduce the magnitudes of aforementioned two channels in the transitory dynamics. We find that distortion changes in sectors that generate significant sales through distant linkages to consumers are disproportionately damaging to the economy. Our results are robust in more general setups such as general constant return to scale production functions and heterogeneous supply chain adjustment costs across sectors