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From Micro to Macro via Production Networks

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  • Vasco M. Carvalho

Abstract

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. In this essay, I argue that this network perspective on production linkages can offer novel insights on how local shocks occurring along this production network can propagate across the economy and give rise to aggregate fluctuations. First, I discuss how production networks can be mapped to a standard general equilibrium setup. In particular, through a series of stylized examples, I demonstrate how the propagation of sectoral 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.

Suggested Citation

  • Vasco M. Carvalho, 2014. "From Micro to Macro via Production Networks," Journal of Economic Perspectives, American Economic Association, vol. 28(4), pages 23-48, Fall.
  • Handle: RePEc:aea:jecper:v:28:y:2014:i:4:p:23-48
    Note: DOI: 10.1257/jep.28.4.23
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • D57 - Microeconomics - - General Equilibrium and Disequilibrium - - - Input-Output Tables and Analysis
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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