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Recessions are often attributed in popular opinion and by policymakers to large, identifiable, negative shocks, which hit specific important sectors. For example, the slow recovery from the last U.S. recession was attributed to the attacks of September 11, 2001, which hit the travel sector. Terrorism also hurt tourist destinations like Israel, while natural disasters wrecked the tourism and fishing sectors in Louisiana (Hurricane Katrina) and South Asia (the 2004 tsunami).

It is not obvious how such a temporary sectoral shock gets propagated across sectors and through time, thus affecting the entire economy negatively even after it is gone. This paper discusses one propagation mechanism and demonstrates it in an environment that is based on the monetary search model of Kiyotaki and Wright (1989, 1993). Since that model is supposedly too narrow for analyzing broad macroeconomic issues, I explain the intuition up front. In the model there are n types of agents and goods, and agents specialize in production and consumption: Type i produces good i and consumes good i+1 (mod n). If the production of good i is temporarily impossible the income of type i agents is reduced. They will buy less of their consumption good, good i+1, next period. Their low demand for good i+1 will, in turn, reduce the money holdings of that good’s producers type i+1 agents so those agents will later buy less of good i+2, and so on. The propagation of the shock continues in a chain reaction from one sector to another even if the shock to good i lasts only one period.