Distortions in Production Networks

Abstract

for their valuable feedback and suggestions. We owe special thanks to V.V. Chari, Ian Dew-Becker, Chad Jones, Marco Ortiz, and Alberto Trejos for their insightful conference discussions of our paper. Finally, this paper benefitted greatly from the constructive comments of colleagues and seminar participants at Columbia, the Federal Reserve Bank of Richmond, UCSD, USC, the Paris School of Economics, Ente Einaudi, and Cambridge University, as well as the helpful feedback of organizers and participants of the following conferences: the Chicago Booth Junior Finance Symposium, the Central Bank of Peru 30th Research Meeting of Economists, the 7th Annual NBER Conference on Macroeconomics Across Time and Space hosted by the Federal Reserve Bank of Philadelphia, the 2013 SED meetings, the 2013 NBER Summer Institute EFG Meeting, the 2014 AEA meetings, the Wisconsin School of Business 5th Annual Conference on Money, Banking and Asset Markets, the 2015 Tepper-LAEF Macro Finance Conference, and the 2016 LAEF Pecuniary Externalities Conference. We declare that we have no relevant financial nor material interests related to the research described in this paper. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.© 2016 by Saki Bigio and Jennifer La'O. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. ABSTRACTWe study how an economy's production structure determines the response of aggregate output and employment to sectoral financial shocks. In our framework, economic production is organized in an input-output network in which firms face financial constraints on their working capital. We show how sectoral financial shocks propagate through the network and manifest at the aggregate level through two channels: a fall in total factor productivity and an aggregate labor wedge distortion. The strength of each channel depends on the overall network architecture and the location of shocks. Finally, we calibrate our model to the U.S. input-output tables and use it to quantitatively assess the role of the network multiplier within the context of the recent Financial Crisis and the Great Recession.

Networks in Production: Asset Pricing Implications

“…Therefore, sparsity and concentration factors are absent in their analysis. Also, their paper focuses on the origins of aggregate fluctuations, while I am interested in identifying priced sources of systematic risk Carvalho (2010), Acemoglu, Ozdaglar, and Tahbaz-Salehi (2013), Aobdia, Caskey, and Ozel (2013), Babus (2013), Biggio and La'O (2013), Carvalho and Grassi (2014), Carvalho and Voigtlander (2014), Carvalho (2014), Farboodi (2014, Malamud and Rostek (2014), Finally, Allen and Babus (2008) present a detailed review of network models applied to finance. 3 The idea of having aggregate shocks originate from idiosyncratic shock is also discussed by Jovanovic (1987), Bak, Chen, Scheinkman, andWoodford (1993), andGabaix (2011).…”

Network-Motivated Lending Decisions

“…However, studies within macroeconomics tend to focus on the impact of sector-specific shocks on aggregate variables. The list of related macroeconomic studies includes Long andPlosser (1983), andHorvath (2000) about the simulation of aggregate variables, Battiston et al (2007) about firm distributions, Acemoglu et al (2012) about the possibility of an idiosyncratic shock to be transformed into an aggregate shock, and Bigio and La'O (2013) about the aggregate impact of collateral constraints.…”

Price Rigidities and the Granular Origins of Aggregate Fluctuations

“…Carvalho and Grassi (2015) study the effect of large firms in a quantitative business-cycle model with entry and exit. Bigio and La'O (2016) study the aggregate effects of the tightening of financial frictions in a production network. Despite a different focus, we share our finding with Baqaee (2016) and Bigio and La'O (2016) that the Hulten theorem does not apply in economies with frictions.…”