Research Discussion Papers, Bank of Finland
No 25/2015:
Networks and the macroeconomy: an empirical exploration
Daron Acemoglu, Ufuk Akcigit and William R Kerr ()
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.
Keywords: economic fluctuations; geographic collocation; input-output linkages; networks; propagation; shocks; (follow links to similar papers)
JEL-Codes: E32; (follow links to similar papers)
100 pages, December 9, 2015
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