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Aggregate Fluctuations and the Network Structure of Intersectoral Trade

  • Vasco M Carvalho

    (University of Chicago)

This paper analyzes the flow of intermediate inputs across sectors by adopting a network perspective on sectoral interactions. I apply these tools to show how fluctuations in aggregate economic activity can be obtained from independent shocks to individual sectors. First, I characterize the network structure of input trade in the U.S. On the demand side, a typical sector relies on a small number of key inputs and sectors are homogeneous in this respect. However, in their role as input-suppliers sectors do differ: many specialized input suppliers coexist alongside general purpose sectors functioning as hubs to the economy. I then develop a model of intersectoral linkages that can reproduce these connectivity features. In a standard multisector setup, I use this model to provide analytical expressions linking aggregate volatility to the network structure of input trade. I show that the presence of sectoral hubs - by coupling production decisions across sectors - leads to fluctuations in aggregates.

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Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 1062.

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Date of creation: 2008
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Handle: RePEc:red:sed008:1062
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  1. Gabaix, Xavier & Ioannides, Yannis M., 2004. "The evolution of city size distributions," Handbook of Regional and Urban Economics, in: J. V. Henderson & J. F. Thisse (ed.), Handbook of Regional and Urban Economics, edition 1, volume 4, chapter 53, pages 2341-2378 Elsevier.
  2. Jovanovic, Boyan, 1987. "Micro Shocks and Aggregate Risk," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 395-409, May.
  3. Scheinkman, Jose A & Woodford, Michael, 1994. "Self-Organized Criticality and Economic Fluctuations," American Economic Review, American Economic Association, vol. 84(2), pages 417-21, May.
  4. Horvath, Michael, 2000. "Sectoral shocks and aggregate fluctuations," Journal of Monetary Economics, Elsevier, vol. 45(1), pages 69-106, February.
  5. Norrbin, Stefan C. & Schlagenhauf, Don E., 1990. "Sources of output fluctuations in the United States during the inter-war and post-war years," Journal of Economic Dynamics and Control, Elsevier, vol. 14(3-4), pages 523-551, October.
  6. Xavier Gabaix, 2009. "The Granular Origins of Aggregate Fluctuations," NBER Working Papers 15286, National Bureau of Economic Research, Inc.
  7. Russell Cooper & John C. Haltiwanger, 1987. "Inventories and the Propagation of Sectoral Shocks," NBER Working Papers 2425, National Bureau of Economic Research, Inc.
  8. Timothy G. Conley & Bill Dupor, 2003. "A Spatial Analysis of Sectoral Complementarity," Journal of Political Economy, University of Chicago Press, vol. 111(2), pages 311-352, April.
  9. Szyld, Daniel B, 1985. "Conditions for the Existence of a Balanced Growth Solution for the Leontief Dynamic Input-Output Model," Econometrica, Econometric Society, vol. 53(6), pages 1411-19, November.
  10. Peter Bak & Kan Chen & Jose Scheinkman & Michael Woodford, 1992. "Aggregate Fluctuations from Independent Sectoral Shocks: Self-Organized Criticality in a Model of Production and Inventory Dynamics," NBER Working Papers 4241, National Bureau of Economic Research, Inc.
  11. Dupor, Bill, 1999. "Aggregation and irrelevance in multi-sector models," Journal of Monetary Economics, Elsevier, vol. 43(2), pages 391-409, April.
  12. Michael Horvath, 1998. "Cyclicality and Sectoral Linkages: Aggregate Fluctuations from Independent Sectoral Shocks," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(4), pages 781-808, October.
  13. James E. Rauch, 1996. "Networks versus Markets in International Trade," NBER Working Papers 5617, National Bureau of Economic Research, Inc.
  14. Shea, John S, 2002. "Complementarities and Comovements," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(2), pages 412-33, May.
  15. Nirei, Makoto, 2006. "Threshold behavior and aggregate fluctuation," Journal of Economic Theory, Elsevier, vol. 127(1), pages 309-322, March.
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