A model of the indirect losses from negative shocks in production and finance.

Hazem Krichene,Abhijit Chakraborty,Takashi Isogai,Hiroyasu Inoue,Lizhi Xing

doi:10.1371/journal.pone.0239293

Abstract

Economies are frequently affected by natural disasters and both domestic and overseas financial crises. These events disrupt production and cause multiple other types of economic losses, including negative impacts on the banking system. Understanding the transmission mechanism that causes various negative second-order post-catastrophe effects is crucial if policymakers are to develop more efficient recovery strategies. In this work, we introduce a credit-based adaptive regional input-output (ARIO) model to analyse the effects of disasters and crises on the supply chain and bank-firm credit networks. Using real Japanese networks and the exogenous shocks of the 2008 Lehman Brothers bankruptcy and the Great East Japan Earthquake (March 11, 2011), this paper aims to depict how these negative shocks propagate through the supply chain and affect the banking system. The credit-based ARIO model is calibrated using Latin hypercube sampling and the design of experiments procedure to reproduce the short-term (one-year) dynamics of the Japanese industrial production index after the 2008 Lehman Brothers bankruptcy and the 2011 Great East Japan earthquake. Then, through simulation experiments, we identify the chemical and petroleum manufacturing and transport sectors as the most vulnerable Japanese industrial sectors. Finally, the case of the 2011 Great East Japan Earthquake is simulated for Japanese prefectures to understand differences among regions in terms of globally engendered indirect economic losses. Tokyo and Osaka prefectures are the most vulnerable locations because they hold greater concentrations of the above-mentioned vulnerable industrial sectors.

Highlights

Economies are vulnerable to successive negative shocks, which could be a natural disaster, such as Hurricane Katrina in the U.S [1] or the 2011 Great East Japan Earthquake in Japan [2, 3], or an economic or financial crisis, such as the 2007-2008 financial crisis [4, 5] or the Japanese banking crisis [6]
In the credit-based adaptive regional input-output (ARIO), production is represented by the supply chain network of listed Japanese firms, where the weight of links represents the money flows of traded intermediate goods between suppliers and customers
To calibrate our model based on the explored parameter space, we look at minimizing the distance between the simulated and the real output by using the Japanese industrial production (IIP)

Summary

Introduction

Economies are vulnerable to successive negative shocks, which could be a natural disaster, such as Hurricane Katrina in the U.S [1] or the 2011 Great East Japan Earthquake in Japan (the 2011 Great Earthquake) [2, 3], or an economic or financial crisis, such as the 2007-2008 financial crisis [4, 5] or the Japanese banking crisis [6]. In the credit-based ARIO, production is represented by the supply chain network of listed Japanese firms, where the weight of links represents the money flows of traded intermediate goods between suppliers and customers. Firms and banks do not create new connections within 1 year of a shock based on the fact that it is difficult to obtain new trade contracts during economic contractions with a lower level of solvency; see [11] It is assumed in the short run that final consumers maintain the same level of demand for final goods, which is supported by the empirical findings in [32].

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Findings

Literature