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Network Transmission of Fiscal Demand Shocks in Commodity-Dependent Economies

Author

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  • Uribe-Terán, Carlos
  • Zanoni, Wladimir
  • Grijalva, Diego F.
  • Brborich, Sara
  • Manzano, Osmel

Abstract

We study how procurement-driven fiscal contractions propagate through firm-to-firm pro- duction networks. The 2014 collapse in oil prices triggered a sharp fall in public procure- ment in Ecuador, generating an externally driven fiscal demand shock. Using administra- tive data covering the universe of formal firms from 2012 to 2019, we link balance sheets, transaction-level buyerseller records, and procurement purchases to construct baseline exposure measures that trace the shock from government contractors to their trading part- ners. Direct suppliers to the State experience persistent declines in revenues of 3.58.6%, labor costs of 4.28.6%, and investment of up to 5.7%. Network structure amplifies these ef- fects: contractors embedded in dense procurement clusters suffer additional revenue losses of 2026% and labor cost reductions of 1114%. Spillovers are economically meaningful: firms with no public contracts but selling to state suppliers experience revenue declines of up to 7.3% and labor cost reductions near 6%. Aggregating these causal estimates im- plies a network-adjusted fiscal multiplier of 1.95: a one-dollar reduction in procurement lowers aggregate value added by $1.95, compared with $1.18 when network propagation is ignored. Production linkages therefore account for about 39% of the total output response.

Suggested Citation

  • Uribe-Terán, Carlos & Zanoni, Wladimir & Grijalva, Diego F. & Brborich, Sara & Manzano, Osmel, 2026. "Network Transmission of Fiscal Demand Shocks in Commodity-Dependent Economies," IDB Publications (Working Papers) 14485, Inter-American Development Bank.
    • Handle: RePEc:idb:brikps:14485
    DOI: http://dx.doi.org/10.18235/0013924
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    More about this item

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • O54 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Latin America; Caribbean

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