Global Value Chains and the Business Cycle

In this paper I investigate the role of position in global value chains in the transmission of final demand shocks and the cyclicality and volatility of trade. Relying on a production network model with propagation via procyclical inventory adjustment, I show how shocks can magnify or dissipate upstream. I test the theoretical results empirically using input-output data. I find that industries far from consumers respond to final demand shocks up to twice as much as final goods producers. I also document the critical role of the position in the global value chain for countries’ cyclical macroeconomic response: i) controlling for bilateral similarity in global value chain position eliminates the standard correlation between similarity in industrial structure and bilateral output comovement; ii) two indicators, measuring the number of steps of production embedded in the trade balance and the degree of mismatch between exports and imports, explain between 10\% and 50\% of the volatility and the cyclicality of net exports.