Sectoral shocks and home substitution

We show that the effect of a sectoral shock on the composition of sectoral shares crucially depends on whether the goods produced in the sector are home-substitutable or not. When a productivity shock hits the market sector that produces non-home-substitutable goods (e.g. manufacturing goods), the shock largely affects the composition of consumption shares of market sectors. On the other hand, when a shock hits the market sector that produces home-substitutable goods (e.g. service goods), relocation in shares mainly occurs between the sector and the home sector. We compare our results to those of the traditional three-sector model without a home sector, and show that the missing of the home substitution effects predicts completely different implications for the response of consumption shares to sectoral shocks. (C) 2019 Elsevier B.V. All rights reserved.