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Beyond Domar Weights: A New Measure of Systemic Importance in Production Networks 

Girish Bahal and Damian Lenzo

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: We present a new measure of producers’ aggregate importance in a production economy with input-output linkages. Unlike existing measures, which capture the impact of an isolated TFP shock to a sector on aggregate output, we quantify how a sector amplifies simultaneous shocks to all producers in the economy. In our context, a sector’s systemic importance reflects its ability to i) directly impact final demand, ii) indirectly affect the production of downstream firms, and iii) amplify shocks originating in other industries. Notably, our measure encompasses and extends an existing notion of centrality in production networks: producers’ Domar weight. Using US input-output data, we find that Domar weights underestimate sectors’ systemic importance by ≈ 50%, on average, and the extent of underestimation increases with the Domar weight of the sector. Additionally, our measure reveals significant changes in key US industries’ aggregate importance over time despite the relative stability of their Domar weights.

Keywords: production networks; propagation of sector-level shocks; disaggregated macroeconomic models (search for similar items in EconPapers)
JEL-codes: D24 D5 D57 E23 E32 O41 (search for similar items in EconPapers)
Pages: 58 pages
Date: 2023-07
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2023-30

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