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Financial Frictions in Production Networks

Saki Bigio and Jennifer La’O
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Jennifer La’O: Columbia University and NBER

No 2016-67, Working Papers from Peruvian Economic Association

Abstract: We study how an economy’s production structure determines the response of aggregate output and employment to sectoral financial shocks. In our framework, economic production is organized in an input-output network in which firms face financial constraints on their working capital. We show how sectoral financial shocks propagate through the network and manifest at the aggregate level through two channels: a fall in total factor productivity and an aggregate labor wedge distortion. The strength of each channel depends on the overall network architecture and the location of shocks. Finally, we calibrate our model to the U.S. input-output tables and use it to quantitatively assess the role of the network multiplier within the context of the recent Financial Crisis and the Great Recession.

Keywords: Production Networks; Financial Frictions; Business Cycles (search for similar items in EconPapers)
JEL-codes: C67 G10 E42 (search for similar items in EconPapers)
Date: 2016-04
New Economics Papers: this item is included in nep-mac and nep-net
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Working Paper: Financial Frictions in Production Networks (2013) Downloads
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