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Cascading Failures in Production Networks

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  • Baqaee, David Rezza

Abstract

This paper analyzes a general equilibrium economy featuring input-output connections, imperfect competition, and external economies of scale owing to entry and exit. The interaction of input-output networks with industry-level market structure affects the amplification of shocks and the pattern of diffusion in the model, generating cascades of firm entry and exit across the economy. In this model, sales provide a poor measure of the systemic importance of industries. Unlike the relevant notions of centrality in competitive constant-returns to-scale models, systemic importance depends on the industry's role as both a supplier and as a consumer of inputs, as well as the market structure of industries. A basic calibration of the model suggests that aggregate output is three times more volatile in response to labor productivity shocks when compared to a perfectly competitive model.

Suggested Citation

  • Baqaee, David Rezza, 2018. "Cascading Failures in Production Networks," CEPR Discussion Papers 12922, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:12922
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Kilian Huber, 2018. "Disentangling the Effects of a Banking Crisis: Evidence from German Firms and Counties," American Economic Review, American Economic Association, vol. 108(3), pages 868-898, March.
    2. Ernesto Pasten & Raphael Schoenle & Michael Weber, 2017. "Price Rigidity and the Origins of Aggregate Fluctuations," NBER Working Papers 23750, National Bureau of Economic Research, Inc.
    3. Michael Weber & Ali Ozdagli, 2016. "Monetary Policy Through Production Networks: Evidence from the Stock Market," 2016 Meeting Papers 148, Society for Economic Dynamics.
    4. Krusell, Per & Rudanko, Leena, 2016. "Unions in a frictional labor market," Journal of Monetary Economics, Elsevier, vol. 80(C), pages 35-50.
    5. Julian di Giovanni & Andrei A. Levchenko & Isabelle Mejean, 2018. "The Micro Origins of International Business-Cycle Comovement," American Economic Review, American Economic Association, vol. 108(1), pages 82-108, January.
    6. David Baqaee & Emmanuel Farhi, 2017. "The Macroeconomic Impact of Microeconomic Shocks: Beyond Hulten's Theorem," Working Paper 482151, Harvard University OpenScholar.
    7. Nikolay Chernyshev, 2018. "From Productivity Shifts to Economic Growth: Intersectoral Linkage as an Amplifying Factor," CDMA Working Paper Series 201801, Centre for Dynamic Macroeconomic Analysis.
    8. Ernesto Pasten & Raphael S. Schoenle & Michael Weber, 2017. "Price Rigidities and the Granular Origins of Aggregate Fluctuations," CESifo Working Paper Series 6619, CESifo Group Munich.
    9. David Baqaee & Emmanuel Farhi, 2018. "Productivity and Misallocation in General Equilibrium," 2018 Meeting Papers 357, Society for Economic Dynamics.
    10. Everett Grant, 2018. "The Double-Edged Sword of Global Integration: Robustness, Fragility \& Contagion in the International Firm Network," 2018 Meeting Papers 506, Society for Economic Dynamics.
    11. Vasco M. CARVALHO & NIREI Makoto & SAITO Yukiko, 2014. "Supply Chain Disruptions: Evidence from the Great East Japan Earthquake," Discussion papers 14035, Research Institute of Economy, Trade and Industry (RIETI).
    12. David Rezza Baqaee & Emmanuel Farhi, 2017. "Productivity and Misallocation in General Equilibrium," NBER Working Papers 24007, National Bureau of Economic Research, Inc.
    13. Saki Bigio, 2013. "Financial Frictions in Production Networks," 2013 Meeting Papers 121, Society for Economic Dynamics.
    14. Fabio Ghironi, 2018. "Macro needs micro," Oxford Review of Economic Policy, Oxford University Press, vol. 34(1-2), pages 195-218.
    15. Kenan Huremovic & Fernando Vega-Redondo, 2016. "Production Networks," AMSE Working Papers 1633, Aix-Marseille School of Economics, Marseille, France.
    16. Glenn Magerman & Karolien De Bruyne & Emmanuel Dhyne & Jan Van Hove, 2016. "Heterogeneous Firms and the Micro Origins of Aggregate Fluctuations," Working Papers ECARES ECARES 2016-35, ULB -- Universite Libre de Bruxelles.
    17. Molnarova, Zuzana & Molnárová, Zuzana & Reiter, Michael, 2016. "Business Cycles and the Propagation of Shocks in the Input-Output Network," Annual Conference 2016 (Augsburg): Demographic Change 145804, Verein für Socialpolitik / German Economic Association.
    18. Daron Acemoglu & Pablo D. Azar, 2017. "Endogenous Production Networks," NBER Working Papers 24116, National Bureau of Economic Research, Inc.
    19. Saki Bigio & Jennifer La’O, 2016. "Financial Frictions in Production Networks," Working Papers 2016-67, Peruvian Economic Association.
    20. Grant, Everett & Yung, Julieta, 2017. "The Double-Edged Sword of Global Integration: Robustness, Fragility & Contagion in the International Firm Network," Globalization Institute Working Papers 313, Federal Reserve Bank of Dallas.
    21. Charles D. Brummitt & Kenan Huremovic & Paolo Pin & Matthew H. Bonds & Fernando Vega-Redondo, 2017. "Contagious disruptions and complexity traps in economic development," Papers 1707.05914, arXiv.org.
    22. KASHIWAGI Yuzuka & TODO Yasuyuki & Petr MATOUS, 2018. "Propagation of Shocks by Natural Disasters through Global Supply Chains," Discussion papers 18041, Research Institute of Economy, Trade and Industry (RIETI).
    23. Mathieu Taschereau-Dumouchel, 2017. "Cascades and Fluctuations in an Economy with an Endogenous Production Network," 2017 Meeting Papers 700, Society for Economic Dynamics.

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