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Propagation of Economic Shocks in Input-Output Networks: A Cross-Country Analysis

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  • Martha G. Alatriste Contreras
  • Giorgio Fagiolo

Abstract

This paper investigates how economic shocks propagate and amplify through the input-output network connecting industrial sectors in developed economies. We study alternative models of diffusion on networks and we calibrate them using input-output data on real-world inter-sectoral dependencies for several European countries before the Great Depression. We show that the impact of economic shocks strongly depends on the nature of the shock and country size. Shocks that impact on final demand without changing production and the technological relationships between sectors have on average a large but very homogeneous impact on the economy. Conversely, when shocks change also the magnitudes of input-output across-sector interdependencies (and possibly sector production), the economy is subject to predominantly large but more heterogeneous avalanche sizes. In this case, we also find that: (i) the more a sector is globally central in the country network, the largest its impact; (ii) the largest European countries, such as those constituting the core of the European Union's economy, typically experience the largest avalanches, signaling their intrinsic higher vulnerability to economic shocks.

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Bibliographic Info

Paper provided by Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy in its series LEM Papers Series with number 2014/09.

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Date of creation: 04 Feb 2014
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Handle: RePEc:ssa:lemwps:2014/09

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Keywords: Complex networks; input-output networks; shock diusion; spreading mechanisms; avalances; economic crises;

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