Networks in Macroeconomics
Paper Session
Friday, Jan. 6, 2023 2:30 PM - 4:30 PM (CST)
- Chair: Ezra Oberfield, Princeton University
Growth and the Fragmentation of Production
Abstract
How much do changes in the fragmentation of production contribute to growth? Using detailed plant-level data on the manufacturing sector in India between 1990 and 2014, we study a version of Smithian growth, the link between greater fragmentation of supply chains and productivity. We propose a measure of a plant's vertical span, which corresponds roughly to the number of stages in a supply chain that the plant performs in-house; when plants have smaller vertical spans, production is more fragmented. We find that fragmentation increases with development in both the cross-section and time series. Further, within locations at a point in time, larger plants tend to have smaller vertical spans, and those that increase sales tend to decrease vertical span. Using changes in demand during the tariff liberalization in the 1990s, we provide evidence that increased demand causes specialization. We find evidence from economies of scale in specialization. We construct a general equilibrium model to rationalize these findings and estimate the sources and magnitude of scale economies. Goods are produced in a succession of steps, each combining labor and a set of intermediate inputs, giving rise to a tree-like structure. Firms exert effort to find suppliers for inputs, and choose the set of production stages (and thereby inputs) to produce the output at lowest cost. The structure implies that the returns to searching are more strongly diminishing for inputs that are further upstream. Firms with high productivity draws are therefore more likely to choose to be more vertically specialized.Endogenous Production Networks under Supply Chain Uncertainty
Abstract
Supply chain disturbances can lead to substantial increases in production costs. To mitigate these risks, firms may take steps to reduce their reliance on volatile suppliers. We construct a model of endogenous network formation to investigate how these decisions affect the structure of the production network and the level and volatility of macroeconomic aggregates. When uncertainty increases in the model, producers prefer to purchase from more stable suppliers, even though they might sell at higher prices. The resulting reorganization of the network leads to less macroeconomic volatility, but at the cost of a decline in aggregate output. The model also predicts that more productive and stable firms have higher Domar weights—a measure of their importance as suppliers—in the equilibrium network. We calibrate the model to U.S. data and find that the mechanism can account for a sizable decline in expected GDP during periods of high uncertainty like the Great Recession.Endogenous Production Networks and Non-Linear Monetary Transmission
Abstract
I develop a tractable sticky-price model, where input-output linkages are formed endogenously. The model delivers cyclical properties of networks that are consistent with those I estimate using sectoral and firm-level data, conditional on identified real and nominal shocks. A novel source of state dependence in nominal rigidities arises: the strength of complementarities in price setting and monetary non-neutrality increase in the number of suppliers that firms optimally choose to have. As a result, the model simultaneously rationalizes the following observed non-linearities in monetary transmission. First, the model produces cycle dependence: the magnitude of real GDP's response to a monetary shock is procyclical. This occurs because in expansions the level of productivity is high, encouraging cost-minimizing firms to connect to more suppliers, which makes pricing decisions more co-ordinated and monetary non-neutrality stronger. Second, there is path dependence: non-neutrality of real GDP is higher following previous periods of loose monetary policy. This happens as under nominal rigidities higher supply of money makes prices charged by suppliers cheap relative to the cost of in-house labor, encouraging more connections and strengthening pricing complementarities. Third, there is size dependence: larger monetary expansions make the network denser and have a disproportionally larger effect on GDP than smaller expansions. On the other hand, larger monetary contractions shrink the network and generate a disproportionally smaller decrease in GDP. Such size dependence holds even if the probability of price adjustment is state-independent.JEL Classifications
- O1 - Economic Development
- D2 - Production and Organizations