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Foreign demand shocks to production networks: Firm responses and worker impacts

Emmanuel Dhyne, Ayumu Ken Kikkawa, Toshiaki Komatsu, Magne Mogstad and Felix Tintelnot,
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Emmanuel Dhyne: : Economics and Research Department, National Bank of Belgium
Ayumu Ken Kikkawa: Sauder School of Business, UBC
Felix Tintelnot,: University of Chicago and NBER

No 412, Working Paper Research from National Bank of Belgium

Abstract: We quantify and explain the firm responses and worker impacts of foreign demand shocks to domestic production networks. To capture that firms can be indirectly exposed to such shocks by buying from or selling to domestic firms that import or export, we use Belgian data with information on both domestic firm-to-firm sales and foreign trade transactions. Our estimates of firm responses suggest that Belgian firms pass on a large share of a foreign demand shock to their domestic suppliers, face upward-sloping labor supply curves, and have sizable fixed overhead costs in labor. Motivated and guided by these findings, we develop and estimate an equilibrium model that allows us to study how idiosyncratic and aggregate changes in foreign demand propagate through a small open economy and affect firms and workers. Our results suggest that the way the labor market is typically modeled in existing research on foreign demand shocks — with no fixed costs and perfectly elastic labor supply — would grossly understate the decline in real wages due to an increase in foreign tariffs.

Keywords: Production networks; Foreign demand shocks; Imperfect labor market; Fixed costs. (search for similar items in EconPapers)
JEL-codes: E00 F16 J22 (search for similar items in EconPapers)
Pages: 81 pages
Date: 2022-09
New Economics Papers: this item is included in nep-int, nep-lma and nep-net
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