Negative IO Supply Shock Analyses: When Substitution Matters

What is it about?

The inoperability IO model is one of the most used approaches to estimate the indirect impacts of negative supply shocks. It is a regular IO model formulated in relative changes that inadequately estimates only part of only the negative demand-side impacts of disasters, while it completely ignores the positive substitution effects on the supply-side. Other IO approaches are also shown to be unsuited to this task. An information minimizing interindustry programming model is presented as an alternative. Its basic assumption is that economic actors, after a disaster, primarily try to restore their old pattern of economic transactions. By adding the usual fixed ratio assumptions of SU models an indication is given of the heavy over-estimation of the negative impacts of a supply shock when demand-driven IO models are used. Finally, to model the reconstruction phase of major disasters the dynamic IO model is added to this approach.

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