Micro Structure and Macro Outcomes

Project Information

MICRO2MACRO

Grant agreement ID: 101001221

DOI

10.3030/101001221

EC signature date 4 February 2021

Start date 1 May 2021

End date 31 October 2026

Funded under

• EXCELLENT SCIENCE - European Research Council (ERC)

Total cost

€ 1 877 295,00

EU contribution

€ 1 877 295,00

Coordinated by

THE CHANCELLOR MASTERS AND SCHOLARS OF THE UNIVERSITY OF CAMBRIDGE
United Kingdom

Periodic Reporting for period 3 - MICRO2MACRO (Micro Structure and Macro Outcomes)

Reporting period: 2024-05-01 to 2025-10-31

Summary of the context and overall objectives of the project

Work under the Micro2Macro ERC grant has the overall objective of understanding macroeconomic outcomes as an emergent phenomenon, resulting from the aggregation of decisions by interlinked micro-units of production operating in narrow, possibly frictional, markets and subject to localized disruptions.

This research sheds light on important societal issues: how does the welfare of a country or region depend on the structure of local and global supply chains? Do disruptions to central or large firms in these supply chains present a source of aggregate risk? Do these firms exert market power, extracting abnormal profits precisely because of their central and systemic positions in these economy-wide chains of production? Is the interlinked nature of the economy important for innovation and growth outcomes? Finally, how can policy makers monitor these complex chains of production that have remained largely invisible but nevertheless exert their influence on societal outcomes, as evidenced, for example during COVID-19?

Under this broad agenda, the Micro2Macro project focuses on three different themes. The first theme develops novel theory on market power in production networks and explores how this perspective may inform policy makers and academics. It asks the following questions: (i) Where does market power lie? Can models of production networks help identify market power bottlenecks in supply chain data? (ii) How is competition policy affected by production networks? (iii) Can this micro-to-macro approach inform unresolved debates on the cyclicality of markups?

Second, while the literature has mostly focused on how production networks can help in understanding business cycles and short term disruptions, the implications for innovation and growth are largely unexplored. The second theme of Micro2Macro puts forward a view of the networked nature of innovation and explores its implications for aggregate growth. It asks: (i) Do innovation decisions cascade throughout the supply chain in response to final demand market size effects? (ii) How do firms explore the knowledge space? Do firms shift between exploiting in depth a given technology and exploring in a new technological domain? (iii) What are the asset pricing implications of unbalanced growth at a micro level?

The third theme of Micro2Macro explores how naturally occurring transaction-level data can help surmount empirical bottlenecks in the existent literature. We ask: (i) Whether transaction records can be tapped into to provide a substitute for classical national accounts objects such as disaggregated GDP measures and detailed input-output tables (ii) Whether this data can be deployed to understand the propagation of highly localized shocks through final demand linkages.

Work performed from the beginning of the project to the end of the period covered by the report and main results achieved so far

Main results so far:

- Development of novel models and algorithms to detect sources of market power in supply chains, allowing researchers and policymakers to pinpoint the likelihood of a given firm exerting market power due to its position in economy wide chains of production.
- Development of novel models and extensive data validation on the cyclical nature of market power and pure profit rates, at firm, sector and aggregate levels.
- Novel predictors of cross-country income growth differentials by relating those differentials to a country’s supply chains and their interlinkages in the global economy.
- Development of methods to assess the impact of government demand and, in particular military spending, on economy wide incentives to innovate and invest in R&D and how these demand pull forces work via supply chains.
- Development of new machine learning methods to understand the rate and exploratory nature of innovation based on large scale panel text
- Collaboration with large financial institutions to develop new methods that render every day transaction records into useful national account statistics and applications of these new statistical indicators to understand societal adjustments during COVID-19 or reactions to monetary policy and changes in interest rates.

Progress beyond the state of the art and expected potential impact (including the socio-economic impact and the wider societal implications of the project so far)

Work under Micro2macro takes the research field well beyond its current frontier in what concerns the compilation of valuable social information, in the form of timely, informative and high quality statistics about the economy, society and population. The current compilation of these statistics faces a number of challenges: timely statistics are hard to collect, costly and are, in some cases, subject to political interference. While high frequency indicators derived from naturally occurring transaction data are increasingly available to policy makers and researchers these are typically non-exhaustive (e.g. indicators of economic activity based on credit card usage), non-compatible with well-defined economic measures (combining for example consumption and investment expenses) and opaque in their construction, in that they are supplied ready-made and packaged by data vendors. As such they are useful proxies but their conceptual status (how they relate to consumption or investment or intermediate input transactions), and hence value to the public remains unclear. Work under Micro2macro goes significantly further than this. Suppose you have access to all transactions, from a household buying coffee, to the coffee maker buying beans and machines, to the coffee bean producer paying its employees. Suppose further that you also have access to all mediums of transactions, from cash settlement, to card, to wire transfers, to cheques, to direct debits. And now suppose you derive ways of usefully organizing, classifying and labelling all such transactions so that they accord to the conceptual framework used by both National Statistical Offices and Economists. Then, what you have is a new way of producing National Accounts, at almost any level of time frequency and any level of disaggregation and detail. Work under Micro2macro delivers just this: a first proof of concept that a new way of deriving socially useful measurement (at potentially a fraction of the cost) is possible by partnering with institutions where this transaction data is naturally generated and held. This work is, to the best of my knowledge completely novel in scope and its implications for societal measurement.