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  5. Heterogeneity and Aggregate Dynamics
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Heterogeneity and Aggregate Dynamics

Paper Session

Saturday, Jan. 4, 2025 10:15 AM - 12:15 PM (PST)

San Francisco Marriott Marquis, Foothill B
Hosted By: International Society for Inventory Research
  • Chair: Sergio Salgado, University of Pennsylvania

Putty-Clay Production Networks

Thomas Winberry
,
University of Pennsylvania
Christian vom Lehn
,
Brigham Young University

Abstract

How do idiosyncratic shocks to particular sectors in the economy spill over to other sectors,
and can the resulting dynamics drive aggregate business cycle events? A large literature
on production networks has focused on the role of the input-output network of intermediate
goods as a key driver of these spillovers.1 The current generation of models in this literature
predict that these spillovers largely occur instantaneously, but in reality they likely take time
to fully implement because firms must re-organize their production practices. Our goal in
this project is to better understand the dynamics of these input-output spillovers and assess
the aggregate implications of those dynamics.

Supply Chain Recessions

Shafaat Yar Khan
,
Syracuse University
George Alessandria
,
University of Rochester and NBER
Carter Mix
,
Federal Reserve Board
Kim Rulh
,
University of Wisconsin-Madison and NBER
Armen Khederlarian
,
University of Connecticut

Abstract

We quantify the aggregate recessionary effects of supply-chain delays. A key challenge to the analysis is that the unique features of supply chains - delivery times and inventories - are absent in the standard macroeconomic and trade models used in policy analysis. We thus develop a two-country heterogeneous  rm model with a rich set of supply chain frictions: shipping delays, fixed order costs, and storage costs.
Shipping times and  rm level demand are also stochastic. These frictions lead  firms to hold inventories that depend on the source of supply, domestic or imported, and these inventories influence price setting. We show that transitory increases in shipping times can be quite contractionary and raise prices. The aggregate effects on employment and production are much larger when there is an input-output structure, as delays constrain production. We show that the restocking cycle induced by these shocks is a source of
endogenous persistence. We also show that a static trade model that abstracts from these supply chain frictions is unable to match the aggregate response predicted by our model, even with an equivalent trade cost shock.

Incomplete Information and Investment Inaction

Jonathan Adams
,
University of Florida
Cheng Chen
,
Clemson University
Min Fang
,
University of Florida
Takahiro Hattori
,
University of Tokyo
Eugenio Rojas
,
University of Florida

Abstract

How do investment frictions and information frictions interact? We study this question in a continuous time model of heterogeneous firms facing incomplete information and irreversible investment. We analytically characterize how the information friction distorts firms’ decision rules and stationary distribution. The two frictions interact in rich and substantial ways. Noisier information shrinks a firm’s inaction region, reduces the elasticity of investment to productivity, increases steady-state capital, increases capital misallocation, and makes firms less risky. Then, we test and confirm these predictions using Japanese administrative data
that matches firms’ forecasts to their balance sheets, incomes, and expenditures.

Discussant(s)
Nathan Zorzi
,
Dartmouth College
Maria Jose Carreras-Valle
,
Pennsylvania State University
Ia Vardishvili
,
Auburn University
JEL Classifications
  • E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy
  • E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook