Technical change and macroeconomic resilience to sectoral shocks

Abstract

The technological advances experienced by many economies during the last decades have fundamentally reshaped production functions. How do such changes affect the transmission of sectoral supply-side shocks to the gross domestic product (Domar weights) and hence macroeconomic resilience? We show that Domar weights decrease with the elasticity of substitution if value added is relatively abundant compared to intermediate inputs in production. Empirical evidence from European sectors suggests that the elasticity of substitution has a stronger effect on resilience today than it had some decades ago, with a clear negative contribution to Germany’s resilience post 2010.