 Planning Against Disasters in Dynamic Production NetworksVasco Carvalho, Matias Covarrubias and Galo "Nuñoc" Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge Abstract: In dynamic multisector economies the planner’s optimal capital allocation can dampen the impact of shocks cascading through nonlinear production networks. In a simple environment, we show analytically that when inputs are complementary and risk aversion is not too low, (i) optimal capital allocation under uncertainty involves deliberately over-investing, relative to the deterministic optimum, in upstream sectors in order to mitigate severe economic downturns; (ii) this strategy can reduce the average level of consumption and give rise to a high welfare cost of business cycles. Deploying novel deep-learning techniques in a general environment, we show quantitatively that: (iii) the ergodic distribution of the simulated nonlinear economy features higher mean capital levels in key upstream sectors, lower mean levels of macroeconomic aggregates, realistic aggregate volatility, and a welfare cost of business cycles nearly 30 times larger when nonlinearities are accounted for. Keywords: Deep Learning; Production Networks; Nonlinearities (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:2650 Access Statistics for this paper More papers in Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge |
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