A methodology to study price-quantity interactions in inputoutput modeling: an application to NextGenerationEU funds

Abstract

The input-output (I-O) model is a widely employed tool for examining the interconnected structure of an economy and evaluating policy impacts. The current model consists of two separate and independent modules that describe the underlying factors governing quantities and prices. However, these modules lack any form of interaction, existing in isolated spheres where prices do not influence quantities, and quantities do not affect prices. Consequently, the I-O model has been questioned for its limited descriptive capability, particularly when a more comprehensive assessment is necessary. This study aims to enhance the explanatory capabilities of the I-O model by proposing a novel improvement. We introduce an extended version of the traditional I-O price and quantity models, which integrates them into a unified "price-quantity" model, establishing interdependencies between the two modules. This integrated model could be useful in advancing the explanatory capacity of I-O analysis, without having to resort to computational general equilibrium (CGE) models. As we know, CGE models are considerably more complex and resource-intensive in terms of data requirements compared to I-O models. To evaluate the impact of NextGenerationEU funds on the Spanish economy, we apply this integrated I-O model, utilizing data from a Social Accounting Matrix (SAM) for 2016, the latest year with available official I-O data.