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Forecast Shocks in Production Networks

Author

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  • Can Tian

    (University of Pennsylvania)

Abstract

This paper proposes a dynamic multi-sector production network model in which firms receive news on the future product-specific demand of a representative household. Since production takes time and firms in the production sectors are connected via input-output links, news on the future final demand of an individual product changes firms' forecasts of their future sales, creating economy-wide effects named as forecast shocks. Forecast shocks are transferred upwards through the supplier-customer connections in the network, from the buyer of an input good to the producer. The model explains the asymmetry in the transmission of individual shocks in the network and how shocks to the expectations generate real, persistent effects. The equilibrium is analytically solved and calibrated to the U.S. economy. A preliminary estimation under the assumptions for the shock processes shows the importance of the forecast shocks.

Suggested Citation

  • Can Tian, 2014. "Forecast Shocks in Production Networks," 2014 Meeting Papers 87, Society for Economic Dynamics.
  • Handle: RePEc:red:sed014:87
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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