IDEAS home Printed from https://ideas.repec.org/p/red/sed019/612.html
   My bibliography  Save this paper

Production Networks and the Propagation of Commodity Price Shocks

Author

Listed:
  • Shutao Cao

    (Bank of Canada)

  • Wei Dong

    (Bank of Canada)

Abstract

Commodity price fluctuations have macroeconomic implications not only through resource reallocation, currency value changes and monetary policy reaction, but also through production network linkages. In this paper, we study the propagation of commodity price shocks in a multiple-sector general equilibrium model for a small open economy that exports commodity. In the small open economy, a shock to commodity prices is both aggregate and sectoral. As an aggregate shock, commodity price movements lead to changes in the value of domestic currency, impacting the macro economy due to its size and triggering monetary policy responses. As a sectoral shock, changes in commodity price impact non-commodity sectors in two aspects: impacting demand for the upstream goods and impacting the cost of production in the downstream sectors. Calibrated to the Canadian data, our model suggests that, following a positive shock to commodity prices, production and exports in the commodity sector rises, while the net impact on the rest of the economy's production is negative. The aggregate gross domestic output increases primarily owing to growth in investment and improved trade balance. The export connection with the rest of the world in the open economy production network plays an important role in the process of adjusting to a commodity price shock, while the import connections do not matter nearly as much. We show that these propagation channels of shocks to commodity price explain a large fraction of drop in Canadian real GDP in 2015 following the sharp decline in commodity prices that started in late 2014.

Suggested Citation

  • Shutao Cao & Wei Dong, 2019. "Production Networks and the Propagation of Commodity Price Shocks," 2019 Meeting Papers 612, Society for Economic Dynamics.
  • Handle: RePEc:red:sed019:612
    as

    Download full text from publisher

    File URL: https://economicdynamics.org/meetpapers/2019/paper_612.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Andrew T. Foerster & Pierre-Daniel G. Sarte & Mark W. Watson, 2011. "Sectoral versus Aggregate Shocks: A Structural Factor Analysis of Industrial Production," Journal of Political Economy, University of Chicago Press, vol. 119(1), pages 1-38.
    2. Cao, Shutao & Dong, Wei & Tomlin, Ben, 2015. "Pricing-to-market, currency invoicing and exchange rate pass-through to producer prices," Journal of International Money and Finance, Elsevier, vol. 58(C), pages 128-149.
    3. Enghin Atalay, 2017. "How Important Are Sectoral Shocks?," American Economic Journal: Macroeconomics, American Economic Association, vol. 9(4), pages 254-280, October.
    4. Champagne, Julien & Sekkel, Rodrigo, 2018. "Changes in monetary regimes and the identification of monetary policy shocks: Narrative evidence from Canada," Journal of Monetary Economics, Elsevier, vol. 99(C), pages 72-87.
    5. Valery Charnavoki & Juan J. Dolado, 2014. "The Effects of Global Shocks on Small Commodity-Exporting Economies: Lessons from Canada," American Economic Journal: Macroeconomics, American Economic Association, vol. 6(2), pages 207-237, April.
    6. Baldwin, John R. Gu, Wulong Yan, Beiling, 2007. "User Guide for Statistics Canada's Annual Multifactor Productivity Program," The Canadian Productivity Review 2007014e, Statistics Canada, Economic Analysis Division.
    7. Lutz Kilian, 2009. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," American Economic Review, American Economic Association, vol. 99(3), pages 1053-1069, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Vasco M. Carvalho & Alireza Tahbaz-Salehi, 2019. "Production Networks: A Primer," Annual Review of Economics, Annual Reviews, vol. 11(1), pages 635-663, August.
    2. Andrew Foerster & Andreas Hornstein & Pierre-Daniel Sarte & Mark W. Watson, 2019. "Aggregate Implications of Changing Sectoral Trends," NBER Working Papers 25867, National Bureau of Economic Research, Inc.
    3. David Rezza Baqaee & Emmanuel Farhi, 2019. "The Macroeconomic Impact of Microeconomic Shocks: Beyond Hulten's Theorem," Econometrica, Econometric Society, vol. 87(4), pages 1155-1203, July.
    4. Altinoglu, Levent, 2021. "The origins of aggregate fluctuations in a credit network economy," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 316-334.
    5. David Rezza Baqaee & Emmanuel Farhi, 2018. "Macroeconomics with Heterogeneous Agents and Input-Output Networks," NBER Working Papers 24684, National Bureau of Economic Research, Inc.
    6. Christian vom Lehn & Thomas Winberry, 2019. "The Investment Network, Sectoral Comovement, and the Changing U.S. Business Cycle," NBER Working Papers 26507, National Bureau of Economic Research, Inc.
    7. Hilde C. Bjørnland & Leif Anders Thorsrud, 2019. "Commodity prices and fiscal policy design: Procyclical despite a rule," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 34(2), pages 161-180, March.
    8. James D. Hamilton, 2019. "Measuring Global Economic Activity," NBER Working Papers 25778, National Bureau of Economic Research, Inc.
    9. Frohm, Erik & Gunnella, Vanessa, 2017. "Sectoral interlinkages in global value chains: spillovers and network effects," Working Paper Series 2064, European Central Bank.
    10. Ernesto Pasten & Raphael S. Schoenle & Michael Weber & Michael Weber, 2017. "Price Rigidities and the Granular Origins of Aggregate Fluctuations," CESifo Working Paper Series 6619, CESifo.
    11. Yukiko Saito & Makoto Nirei & Vasco Carvalho, 2014. "Supply Chain Disruptions: Evidence from Great East Japan Earthquake," 2014 Meeting Papers 595, Society for Economic Dynamics.
    12. Jennifer La'O & Alireza Tahbaz-Salehi, 2020. "Optimal Monetary Policy in Production Networks," NBER Working Papers 27464, National Bureau of Economic Research, Inc.
    13. 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.
    14. Levent Altinoglu, 2018. "The Origins of Aggregate Fluctuations in a Credit Network Economy," 2018 Meeting Papers 626, Society for Economic Dynamics.
    15. Ryan Chahrour & Kristoffer Nimark, 2016. "Sectoral Media Focus and Aggregate Fluctuations," 2016 Meeting Papers 1034, Society for Economic Dynamics.
    16. Stock, J.H. & Watson, M.W., 2016. "Dynamic Factor Models, Factor-Augmented Vector Autoregressions, and Structural Vector Autoregressions in Macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 415-525, Elsevier.
    17. Bjørnland, Hilde C. & Thorsrud, Leif Anders & Torvik, Ragnar, 2019. "Dutch disease dynamics reconsidered," European Economic Review, Elsevier, vol. 119(C), pages 411-433.
    18. Ioannidis, Christos & Ka, Kook, 2018. "The impact of oil price shocks on the term structure of interest rates," Energy Economics, Elsevier, vol. 72(C), pages 601-620.
    19. Jorge Miranda-Pinto & Eric R. Young, 2018. "Flexibility and frictions in multisector models," CAMA Working Papers 2018-24, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    20. Jo, Soojin & Karnizova, Lilia & Reza, Abeer, 2019. "Industry effects of oil price shocks: A re-examination," Energy Economics, Elsevier, vol. 82(C), pages 179-190.

    More about this item

    JEL classification:

    • D57 - Microeconomics - - General Equilibrium and Disequilibrium - - - Input-Output Tables and Analysis
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:red:sed019:612. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/sedddea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Christian Zimmermann (email available below). General contact details of provider: https://edirc.repec.org/data/sedddea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.