Sectoral Shocks and the Role of Market Integration: The Case of Natural Gas

We quantify how market integration affects the economic propagation of sectoral supply shocks at the example of a Russian gas shutoff to the European Union. An open-economy, multisector general equilibrium model suggests that the adverse output impact on the European Union shrinks fourfold if integration with the global liquified natural gas (LNG) market is considered. On the flip side, other LNG importers also see adverse output effects. Due to nonlinearities, the combined total economic damage is less than half with integration, compared to the counterfactual case without. Governments should foster further integration to make economies more resilient to supply shocks.