From Micro to Macro via Production Networks

Vasco M. Carvalho

The Journal of Economic Perspectives · 2014 · 403 citations · 35 references

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TL;DR

A modern economy is an intricately linked web of specialized production units that rely on input flows from suppliers to produce output for downstream units. The essay argues that a network view of production linkages reveals how local shocks propagate to generate aggregate fluctuations, and that combining theory with US input‑output data can illuminate comovement and macro volatility. The author maps production networks onto a standard general‑equilibrium framework and then empirically analyzes the large‑scale US input‑output network to study its structural properties. Stylized examples show that aggregate volatility depends on the shape of the production network, with different arrangements of production altering how sectoral shocks propagate.

Abstract

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.

References

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