Nonlinear Domar aggregation over transforming production networks

Abstract: An economy-wide production network, as a form of monetary input--output coefficients, becomes unstable during the general equilibrium propagation of sectoral productivity shocks, when the substitution elasticities of sectoral production are nonneutral. The associated network transformation hence leads to nonlinearity in aggregating sectoral productivity shocks into the economy's output, i.e., in Domar aggregation. In this study, we demonstrate the possibility of production networks being transformed into a singular one. We also explore the conditions under which productivity shocks are synergistic in Domar aggregation.