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Networks and the macroeconomy: an empirical exploration

Daron Acemoglu, Ufuk Akcigit () and William Kerr ()

No 25/2015, Research Discussion Papers from Bank of Finland

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 di¤erent types of shocks through economic networks and industry interlinkages could have first-order implications for the macroeconomy.

JEL-codes: E32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac, nep-net, nep-soc and nep-ure
Date: 2015-12-09
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Related works:
Journal Article: Networks and the Macroeconomy: An Empirical Exploration (2016) Downloads
Chapter: Networks and the Macroeconomy: An Empirical Exploration (2015) Downloads
Working Paper: Networks and the Macroeconomy: An Empirical Exploration (2015) Downloads
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