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

Abstract

The input-output (I-O) model is a widely employed analytical tool for examining the interconnected structure of an economy and evaluating policy impacts. The standard model consists of two distinct and self-contained modules that describe the underlying factors governing quantities and prices. However, these modules operate independently, existing in separated spheres where prices do not influence quantities and quantities do not affect prices. This limitation restricts the standard model's ability to evaluate market dynamics that involve simultaneous changes in both quantity and price. This study aims to enhance the explanatory capabilities of the I-O model. We introduce an extended version of the traditional I-O price and quantity models, combining them into a unified "price-quantity" model that establishes connections between the two I-O modules. This integrated model could be useful in advancing the explanatory capacity of I-O analysis without having to resort to computable general equilibrium (CGE) models. As it is well-known, CGE models are considerably more complex and demanding in terms of data than I-O models. We apply this integrated I-O model to evaluate the impact of NextGenerationEU funds on the Spanish economy utilizing input-output and national accounts data for 2016.