Networks in Macroeconomics
Saturday, Jan. 7, 2017 7:30 PM – 9:30 PM
- Chair: Xavier Gabaix, Harvard University
International Monetary Policy Spillovers through Production Networks
AbstractMonetary policy shocks have a large impact on aggregate stock market returns in narrow event windows around press releases by the Federal Open Market Committee. We use spatial autoregressions to decompose the overall effect of monetary policy shocks into a direct (demand) effect and an indirect (network) effect. We attribute 50%--85% of the overall effect to indirect effects. The decomposition is robust to different sample periods, event windows, and types of announcements. Direct effects are larger for industries selling most of the industry output to end-consumers compared to other industries. We find similar evidence of large indirect effects using ex-post realized cash-flow fundamentals. A simple model with intermediate inputs guides our empirical methodology. Our findings indicate production networks might be an important propagation mechanism of monetary policy to the real economy.
AbstractUS government spending since World War II has been characterized by large investments in defense related high-tech goods and services and R&D. In turn, this means that the Department of Defense (DoD) has had a large role in funding corporate innovation in the US. This paper (i) quantifies the impact of military procurement spending on corporate innovation by publicly listed firms and (ii) shows that DoD impact on innovation was not limited to the winners of defense contracts but instead cascaded through the supply chain of DoD contractors via indirect market size effects, working through firm-to-firm input linkages. We use a database of detailed, historical procurement contracts for all Department of Defense (DoD) prime contracts since 1966. Product-level spending shifts are used as a source of exogenous variation in firm-level procurement receipts. We combine this data with information on the supply chain linkages of publicly listed firms. Our estimates indicate that defense procurement has a positive direct impact on patenting and R&D investment, with an elasticity of approximately 0.07 across both measures of innovation for DoD contractors. Further, our estimates imply that the derived demand for inputs following the award of a DoD contract constitutes a large indirect market size effect for the suppliers of DoD contractors. These indirect market size effects in turn induce innovation cascades working up the supply chain. We find that the elasticity of innovation outcomes to indirect DoD market size shocks is about half of that estimated for direct contractors but affects a much larger number of firms, roughly doubling the effect of defense spending on aggregate innovation.
Production Networks and the Propagation of Monetary Policy Shocks
AbstractWe develop a multi-sector Calvo model with intermediate inputs to study the quantitative importance of heterogeneities in price rigidities, sector size, and input-output linkages and their interaction for the real effects of monetary policy shocks. We show theoretically real effects are bigger if the share of intermediate inputs is high or if sticky-price sectors are important suppliers to the rest of the economy, to flexible-price sectors, or to large sectors. Quantitatively, heterogeneity in input-output linkages contributes only marginally to the real effects of monetary policy shocks, whereas heterogeneity in the frequency of price adjustment creates large real effects of nominal shocks. Differences in consumption shares have an economically important effect on the total real effects. We calibrate a 350-sector version of the model to the input-output tables from the Bureau of Economic Analysis and the micro data underlying the producer price index from the Bureau of Labor Statistics to reach those conclusions. A less granular calibration with only 58 sectors understates the real effects of monetary policy by 25% with a similar impact response of inflation. The large real effects reflect heterogeneity in price markups due to the different heterogeneities and a higher average level of markups, fully driven by the product market wedge.
- E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy
- E3 - Prices, Business Fluctuations, and Cycles