Nonlinear Input-Output Model with Nested CES Technologies for the Analysis of Macroeconomic Effects of a Foreign Trade Shock

We develop the nonlinear model of optimal resource allocation in a production network with substitution of inputs. The description of production technologies is based on the separation of domestic and import substitution of inputs. That leads to the nested structure of production function of sectors of the economy. Solutions of the optimal resource allocation problem coupled with the solution of the Fenchel’s dual problem gives the competitive equilibrium point in the space of products and price indices. Based on results of research we suggest the technique of solution of model identification and calibration tasks based on the official input-output statistics. For the once calibrated model the shock of the initial scenario conditions shifts the evaluated equilibrium state. That allows to evaluate the macroeconomic impact of shocks within the model. We identify and calibrate the model according to the official available input-output statistics of Russia. We present the results of model scenario evaluations of the macroeconomic responses of the Russia’s aggregated production network to the modern foreign trade shock.