Intersectoral demand linkages: Good shocks, bad outcomes?

When and how are sector-specific price shocks magnified or dampened in general equilibrium with multiple industries and distortions? We develop a general framework with homothetic sectoral preferences and derive a welfare multiplier, which is a sufficient statistic for the share of the direct effect of the shock that materializes in the aggregate. We show that the combination of Cobb–Douglas or CES preferences with monopolistic competition always yields welfare gains from a positive shock. However, a positive sectoral shock may lead to aggregate losses under departures from either CES preferences or monopolistic competition. While our approach is similar to Baqaee and Fahri (2019, 2024), shocks propagate via consumer preferences in our case and production networks in their case, and market structure plays an explicit role in the transmission of shocks in our model.