The nonlinear general equilibrium impact of the financial crisis and the downfall of manufacturing

Based on a detailed mechanism of a constructed model linking explicitly the financial sector with the real sector, factor demand, and household income , this study analyzes the impact of manufacturing downfall on household inc ome in Indonesia. After validating the model by applying sequential shocks (events) during the crisis,:he study revealed that urban households were ha rdest hit in the episode. From a set of counterfactual scenarios, some non- monotonic trends were derived, showing thai despite resulting in worse macr oeconomic indicators, a further decline in selected manufacturing sectors c ould have brought higher incomes to most households than under the factual scenario. When compared with results from further shocks in all manufacturi ng sector, the macroeconomic indicators would have been better. Hence, a se lected decline in the manufacturing sector is not always unfavorable when o ther sectors can step in. From a policy perspective, this would indicate th e importance of inter-sectoral substitutions and policy trade-off.