Do (all) sectoral shocks lead to aggregate volatility? Empirics from a production network perspective

Omar Joya and Eric Rougier

Post-Print from HAL

Abstract: Productive diversification has long been acknowledged as a volatility-reducing strategy. Yet, recent theoretical contributions have shown that, in strongly diversified economies, idiosyncratic shocks could translate into aggregate volatility via the network of inter-industry linkages. By exploiting exogenous cross-country-sector variations in demand shocks during the 2008 Great Recession, we provide empirical evidence that the network properties of a sector affected by an individual shock determine its propensity to transmit volatility to the rest of the economy. More precisely, shocks to sectors that are located in denser parts of a production network fade out over a large number of alternative paths of propagation due to substitution effects, whereas shocks to sectors that are more influential within the network generate aggregate fluctuations through contagion effects. We also find that the impact of sectoral shocks on aggregate volatility (1) is not conditional on sector-level differences in trade intensity, and (2) is larger for developing countries because they tend to have more isolated influential sectors and larger structural holes in their production network. Our results thus help consolidate the two opposite views in the literature on the impact of productive diversification on aggregate volatility.

Keywords: 2008 Global Crisis; Diversification; Economic Diversification; Empirical Analysis; Financial Crisis; Input-Output Analysis; Input–Output Structure; Network Analysis; Production Network Production System; Sectoral Shock; Volatility (search for similar items in EconPapers)
Date: 2019
Note: View the original document on HAL open archive server: https://hal.science/hal-02486376
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Published in European Economic Review, inPress, 113, pp.77-107. ⟨10.1016/j.euroecorev.2019.01.004⟩

Downloads: (external link)
https://hal.science/hal-02486376/document (application/pdf)

Related works:
Journal Article: Do (all) sectoral shocks lead to aggregate volatility? Empirics from a production network perspective (2019)
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:hal:journl:hal-02486376

DOI: 10.1016/j.euroecorev.2019.01.004

Access Statistics for this paper

More papers in Post-Print from HAL
Bibliographic data for series maintained by CCSD ().