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MACRONETS Report Summary

Project ID: 337054
Funded under: FP7-IDEAS-ERC
Country: United Kingdom

Mid-Term Report Summary - MACRONETS (Production Networks in Macroeconomics)

A modern economy is an intricately linked web of specialized production units, each relying on the flow of inputs from their suppliers to produce their own output which, in turn, is routed towards other downstream units. Recent work in economics stresses that the structure of this production network is key in determining whether and how microeconomic shocks – affecting only a particular firm or technology – can propagate throughout the economy and shape aggregateI outcomes. If this is the case, understanding the structure of this production network can better inform both academics on the origins of aggregate fluctuations and policymakers on how to prepare for and recover from adverse shocks that disrupt these production chains. In the project MACRONETS, together with various co-authors, I have so far explored this broad theme in four different sub-projects:

(1) From Micro to Macro via Production Networks. This article provides overview of the nascent literature on production networks in macroeconomics. First, I discuss how production networks can be mapped to a standard setups in economics. In particular, through a series of stylized examples, I demonstrate how the propagation of shocks—and hence aggregate volatility—depends on different arrangements of production, that is, on different "shapes" of the underlying production network. Next I explore, from a network perspective, the empirical properties of a large-scale production network as given by detailed US input-output data. Finally I address how theory and data on production networks can be usefully combined to shed light on comovement and aggregate fluctuations. This is now published in the Journal of Economic Perspectives

(2) Supply Chain Disruptions: Evidence from the Great East Japan Earthquake. This project studies the effects of the 2011 Great East Japan earthquake on Japanese production networks. We document that the disruption caused by the earthquake and its aftermaths propagated both upstream and downstream through the supply chain, affecting the direct and indirect suppliers and customers of disaster-stricken firms. We also use our empirical findings to obtain an estimate for the overall macroeconomic impact of the shock by taking these propagation effects into account. We find that the propagation of the shock over input-output linkages can account for a 1.2 percentage point decline in Japan’s gross output in the year following the earthquake.

(3) Large Firm Dynamics and the Business Cycle. In modern economies, a small number of very large firms account for a disproportionately large share of economic activity. In this project we ask whether the dynamics of these large firm drive the business cycle? We answer this question by developing a quantitative theory of aggregate fluctuations caused by firm-level disturbances alone. We explore the key role of moments of the firm size distribution – and, in particular, the role of large firm dynamics – in shaping aggregate fluctuations, theoretically, quantitatively and in the data.

(4) Input Diffusion and the Evolution of Production Networks. The adoption and diffusion of inputs is at the heart of technological progress. What determines which inputs are initially considered and eventually adopted by innovators? We examine the evolution of input linkages from a network perspective, starting from a stylized model of network formation. Guided by this framework, we document a novel stylized fact at both the sector and the firm level: producers are more likely to adopt inputs that are already used – directly or indirectly – by their current suppliers. In particular, using disaggregated input-output data, we show that initial network proximity of a sector in 1967 significantly increases the likelihood of adoption throughout the subsequent four decades. A one-standard deviation decrease in network distance is associated with an increase in the adoption probability by one third to one half. Similarly, U.S. firms are significantly more likely to develop new input linkages among their suppliers’ network neighborhood. Our results imply that the existing production network plays a crucial role in the diffusion of inputs and the evolution of technology.

Contact

Renata Schaeffer, (European Policy Manager)
Tel.: +44 1223 333543
Fax: +44 1223 332988
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