A LONG‐RUN INTERPRETATION OF REGIONAL INPUT‐OUTPUT ANALYSIS*

Abstract

ABSTRACT. Regional input‐output (I‐O) analysis is traditionally motivated by a short‐run, extreme Keynesian vision of markets. In this paper we argue that an appropriately formulated, investment‐endogenous, I‐O system replicates the long‐run equilibria of a wide range of regional models, many of which do not operate as I‐O systems in the short run. In particular, we use a computable general equilibrium (CGE) framework to illustrate the impact of an aggregate demand disturbance on an I‐O and standard neoclassical model. When run forward over a number of periods, the results from the capacity‐constrained neoclassical model asymptotically approach the I‐O outcome. We use sensitivity analysis to examine the speed of adjustment of the neo‐classical system and investigate barriers to the attainment of the I‐O result.