A new kind of production multiplier for assessing the scale and structure effects of demand shocks in input-output frameworks

Abstract

The main purpose of this paper is to develop a new kind of input-output multiplier that would be particularly well suited to quantifying the impacts of final demand changes on the sectoral output growth potential of an economy. Instead of using the traditional output multipliers, solving an appropriate optimization problem provides what can be called input-output Euclidean distance multipliers. This method does not impose unitary final demand shocks with a fixed (predetermined) structure, allowing the "IO economy" to change across the spectrum of all possible structures. It can be very helpful in measuring interindustry linkages and key sectors in a national or regional economy. An empirical illustration is made, using national (Spain and Portugal) and regional (Balearic Islands and the Azores) input-output data.