Abstract
This work aims to study and explain the business cycle correlations of the Japanese production network. We consider the supplier-customer network, which is a directed network representing the trading links between Japanese firms (links from suppliers to customers). The community structure of this network is determined by applying the Infomap algorithm. Each community is defined by its GDP and its associated business cycle. Business cycle correlations between communities are estimated based on copula theory. Then, based on firms’ attributes and network topology, these correlations are explained through linear econometric models. The results show strong evidence of business cycle correlations in the Japanese production network. A significant systemic risk is found for high negative or positive shocks. These correlations are explained mainly by the sector and by geographic similarities. Moreover, our results highlight the higher vulnerability of small communities and small firms, which is explained by the disassortative mixing of the production network.
Highlights
With financial and economic globalization, trade relationships have become more complex
Over the past forty years, eight major crises have been triggered, representing an average of one crisis every five years. These successive crises changed the manner of thinking of many economists, who are looking for new tools and methods to understand the risks of “modern” economies
Business cycles’ correlation in the Japanese economy economy, some works studied this topic through pre-defined groups based on sector or geographic classifications ([9, 10])
Summary
With financial and economic globalization, trade relationships have become more complex. Over the past forty years, eight major crises have been triggered (e.g., the sovereign debt crisis in Latin American countries in 1982, the stock market crash in 1987, the Asian crisis in 1997– 1998, and the global financial crisis in 2007–2008), representing an average of one crisis every five years These successive crises changed the manner of thinking of many economists, who are looking for new tools and methods to understand the risks of “modern” economies. [1] highlighted that the economics of Nordic countries recovered after 5–10 years, whereas the Japanese economic recession has continued for more than a quarter century These systemic depressions are captured by persistent negative output gaps, which are reflected by negative business cycles (for additional explanations of the relationship between crisis and business cycles, see [2,3,4]). The propagation of positive and negative shocks in an economic system is captured by business cycle correlations between different groups (see [5])
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