Distortions in Production Networks*

Abstract

<jats:title>Abstract</jats:title> <jats:p>How does an economy’s production structure determine its macroeconomic response to sectoral distortions? We study a static, multisector framework in which production is organized in an input-output network and production decisions are distorted. Sectoral distortions manifest at the aggregate level via two channels: total factor productivity (TFP) and the labor wedge. We show that near efficiency, distortions have zero first-order effects on TFP and nonzero first-order effects on the labor wedge, and that a sufficient statistic for the latter are the Domar weights. We thereby provide a Hulten-like theorem for the aggregate effects of sectoral distortions. A quantitative application of the model to the 2008–09 financial crisis suggests that the U.S. input-output structure amplified financial distortions by roughly a factor of two during the crisis.</jats:p>

On the Direct and Indirect Real Effects of Credit Supply Shocks

“…Price and quantity adjustments in general equilibrium may also play a role as shown in a series of recent papers that have investigated the aggregate effects of shocks that propagate through the economy's IO network, such as Acemoglu, Carvalho, Ozdaglar, and Tahbaz-Salehi (2012). Our paper relates to recent work by Bigio and La'o (2017), who quantify the effects of financial shocks in a general equilibrium model in which industries are connected through the IO network. Instead of credit spreads, we use credit registry data to identify financial shocks at the firm level.…”

“…In order to provide further evidence on the strength of this mechanism, we plug our estimated shocks into a general equilibrium model that enables us to quantify the aggregate industry-and macro-level effects of the credit supply shocks estimated above. As already mentioned, we use the model recently developed by Bigio and La'o (2017), which delivers input-output propagation of shocks that affect firms' access to finance (see Appendix H).…”

“…As we can observe, the size of the network effects is significantly larger in magnitude than that of the direct effect. Following Bigio and La'o (2017), we construct a measure of the importance of the network propagation effects in our calibration, the network multiplier. In particular, we calculate the ratio of the total (direct+network ) effects on output to the effects implied by a horizontal (direct).…”

“…wherez(z)Φ(φ) depends on sectoral productivities and financial frictions, L is the endogenous amount of labor in the economy, andη is a constant that reflects the decreasing returns in firms' technology. Bigio and La'o (2017) refer to the termz(z)Φ(φ) as the efficiency wedge and to the term Lη as the labor wedge.…”

“…To further evaluate the extent to which the Spanish production structure may have amplified the effects of our estimated financial shocks, we quantify the aggregate impact of the price adjustments channel by using a general equilibrium model with buyer-supplier relations under the presence of financial frictions, as in Bigio and La'o (2017). The model predicts, for instance, that during the financial crisis, -0.60 pp.…”