A Methodology to Study Price-Quantity Interactions in input-output Modeling: an Application to NextGenerationEU Funds


The input-output (I-O) model is a widely used tool to study the linkage structure of an economy and assess the effects of policies. The model is made up of two modules that describe the underlying forces that govern quantities and prices, but there is no connection between these modules as they reside in unconnected spheres: prices do not interact with quantities, and quantities, in turn, do not interact with prices. Because of this, the I-O model has been questioned for its limited descriptive capacity when a more comprehensive assessment exercise is required. This work tries to contribute an improvement to the explanatory capacity of the I-O model. We develop an extension of the classic I-O price and quantity models to an integrated "price-quantity" model that connects the two modules and makes them interdependent. This new version of the model could be useful to advance the explanatory capacity of I-O analysis without having to resort to the use of computational general equilibrium (CGE) models. As we know, CGE models are more complex in their structure and costlier to implement in terms of required data than I-O models. We use this integrated I-O model to evaluate the impact of NextGenerationEU funds on the Spanish economy using data from a Social Accounting Matrix (SAM) for 2016, the last year with official I-O data.