Abstract

The propagation of macroeconomic shocks through input-output and geographic networks can be a powerful driver of macroeconomic fluctuations. We first exposit that in the presence of Cobb-Douglas production functions and consumer preferences, there is a specific pattern of economic transmission whereby demand-side shocks propagate upstream (to input-supplying industries) and supply-side shocks propagate downstream (to customer industries) and that there is a tight relationship between the direct impact of a shock and the magnitudes of the downstream and the upstream indirect effects. We then investigate the short-run propagation of four different types of industry-level shocks: two demand-side ones (the exogenous component of the variation in industry imports from China and changes in federal spending) and two supply side ones (TFP shocks and variation in knowledge/ideas coming from foreign patenting). In each case, we find substantial propagation of these shocks through the input-output network, with a pattern broadly consistent with theory. Quantitatively, the network-based propagation is larger than the direct effects of the shocks. We also show quantitatively large effects from the geographic network, capturing the fact that the local propagation of a shock to an industry will fall more heavily on other industries that tend to collocate with it across local markets. Our results suggest that the transmission of various different types of shocks through economic networks and industry interlinkages could have first-order implications for the macroeconomy.

Highlights

  • How small shocks are ampli...ed and propagated through the economy to cause sizable ‡uctuations is at the heart of much macroeconomic research

  • A class of potentially-promising approaches based on the spread of small shocks from ...rms or disaggregated sectors through their economic and other links to other units in the economy has generally been overlooked

  • The macroeconomic importance of this idea was downplayed by Lucas’s (1977) famous essay on business cycles on the basis of the argument that if shocks that hit ...rms or disaggregated sectors are idiosyncratic, they would wash out when we aggregate across these units and look at macroeconomic ‡uctuations — due to a law of large numbers-type argument

Read more

Summary

Introduction

How small shocks are ampli...ed and propagated through the economy to cause sizable ‡uctuations is at the heart of much macroeconomic research. The macroeconomic importance of this idea was downplayed by Lucas’s (1977) famous essay on business cycles on the basis of the argument that if shocks that hit ...rms or disaggregated sectors are idiosyncratic, they would wash out when we aggregate across these units and look at macroeconomic ‡uctuations — due to a law of large numbers-type argument Despite this powerful dismissal, this class of approaches has attracted recent theoretical attention. We interpret our results as suggesting that network-based propagation, but not exclusively through the input-output linkages, might be playing a sizable role in macroeconomic ‡uctuations, and certainly a more important one than typically presumed in modern macroeconomics. The last section concludes, while Appendix A and Online Appendices B and C contain further results and omitted proofs

Input-Output Linkages
Data Sources
Upstream and Downstream Networks
Geographic Overlay
Correlation Matrices
Results
Empirical Approach
China Import Shocks
Federal Spending Shocks
TFP Shocks
Foreign Patenting Shocks
VAR Analysis
Combined Shock Analysis
Additional Results
Conclusion
Foreign patenting
Incomplete cycle
Δ Log employment
P-value of Equality Test 200
Full Text
Published version (Free)

Talk to us

Join us for a 30 min session where you can share your feedback and ask us any queries you have

Schedule a call