Input-output networks determine shock spread
A Bank of Russia working paper by Yakov Morozov explores how input-output linkages affect the propagation of supply and demand shocks. The study uses an adapted multisectoral New Keynesian model to analyze various network types.
Network types shape shock responses
The paper theoretically explores how supply and demand shocks propagate within various input-output network types, utilizing an adapted multisectoral New Keynesian model.
It also examines how final consumption shares and industrial specialization influence the intensity of technological shocks.
Findings indicate that diverse intersectoral structures lead to distinct macroeconomic responses to technological shocks.
The interplay between the productivity effect and the nominal wage growth effect can either produce or eliminate cascade amplification in downstream sectors.
The impact of demand shocks is determined by the slope of the consumer-price Phillips curve, which varies significantly with the input-output network type.
This slope was steepest in the horizontal economy, leading to a more pro-inflationary effect from demand shocks, and flattest in the roundabout economy with sticky wages.
Productivity shocks in sectors specializing in final goods consistently provoke greater reactions than those in intermediate goods sectors.
Real-world shock propagation
The study is motivated by the observation that macroeconomic shocks affect economies differently based on their intersectoral structures.
For instance, Germany, with its dense manufacturing network, experienced a shorter recession during COVID-19 compared to Thailand, whose economy is centered on services and tourism.
This highlights how production chains influence shock propagation.
The paper builds on existing literature, including Acemoglu et al. (2012) on network origins of aggregate fluctuations and Rubbo (2023), whose New Keynesian multisector model is adapted here.
It confirms the non-negligible role of intersectoral structure in determining how idiosyncratic shocks propagate, a finding consistent with earlier static models but explored here in a dynamic framework.
Networks matter for policy
This paper provides crucial theoretical insights into how economic networks shape shock propagation.
It clearly demonstrates that intersectoral structures fundamentally determine macroeconomic responses to technological and monetary policy shocks.
Such understanding is vital for central banks to formulate effective policy and assess financial stability risks in complex, interconnected economies.