Planning Against Disasters in Dynamic Production Networks

Vasco Carvalho, Matias Covarrubias and Nuño, Galo

No 21721, CEPR Discussion Papers from Centre for Economic Policy Research

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 (search for similar items in EconPapers)
JEL-codes: C63 C67 E22 E32 (search for similar items in EconPapers)
Date: 2026-07
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP21721 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:21721

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP21721

Access Statistics for this paper

More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK.
Bibliographic data for series maintained by CEPR ().