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From Micro to Macro via Production Networks


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Authors

Carvalho, VM 

Abstract

jats:p A modern economy is an intricately linked web of specialized production units, each relying on the flow of inputs from their suppliers to produce their own output which, in turn, is routed towards other downstream units. In this essay, I argue that this network perspective on production linkages can offer novel insights on how local shocks occurring along this production network can propagate across the economy and give rise to aggregate fluctuations. First, I discuss how production networks can be mapped to a standard general equilibrium setup. In particular, through a series of stylized examples, I demonstrate how the propagation of sectoral shocks—and hence aggregate volatility— depends on different arrangements of production, that is, on different “shapes” of the underlying production network. Next I explore, from a network perspective, the empirical properties of a large-scale production network as given by detailed US input-output data. Finally I address how theory and data on production networks can be usefully combined to shed light on comovement and aggregate fluctuations. </jats:p>

Description

Keywords

Production Networks, Comovement, Business Cycles, Input-Output Linkages

Journal Title

Journal of Economic Perspectives

Conference Name

Journal ISSN

0895-3309
0895-3309

Volume Title

28

Publisher

American Economic Association
Sponsorship
European Research Council (337054)
I would like to acknowledge the nancial support of the European Research Council under the grant "Production Networks in Macroeconomics", #337054, The Cambridge-INET Institute and The Keynes Fellowship at the University of Cambridge.