Input Linkages and the Transmission of Shocks: Firm-Level Evidence from the 2011 Tohōku Earthquake

75 Pages Posted: 13 Nov 2015

See all articles by Christoph Boehm

Christoph Boehm

University of Texas at Austin

Aaron Flaaen

Board of Governors of the Federal Reserve System

Nitya Pandalai-Nayar

University of Texas at Austin - Department of Economics

Date Written: 2015-10-22

Abstract

Using novel firm-level microdata and leveraging a natural experiment, this paper provides causal evidence for the role of trade and multinational firms in the cross-country transmission of shocks. Foreign multinational affiliates in the U.S. exhibit substantial intermediate input linkages with their source country. The scope for these linkages to generate cross-country spillovers in the domestic market depends on the elasticity of substitution with respect to other inputs. Using the 2011 Tohoku earthquake as an exogenous shock, we estimate this elasticity for those firms most reliant on Japanese imported inputs: the U.S. affiliates of Japanese multinationals. These firms suffered large drops in U.S. output in the months following the shock, roughly one-for-one with the drop in imports and consistent with a Leontief relationship between imported and domestic inputs. Structural estimates of the production function for all firms with input linkages to Japan yield disaggreg ated production elasticities that are similarly low. Our results suggest that global supply chains are sufficiently rigid to play an important role in the cross-country transmission of shocks.

Keywords: Multinational firms, international business cycles, business fluctuations, elasticity of substitution

Suggested Citation

Boehm, Christoph and Flaaen, Aaron and Pandalai-Nayar, Nitya, Input Linkages and the Transmission of Shocks: Firm-Level Evidence from the 2011 Tohōku Earthquake (2015-10-22). FEDS Working Paper No. 2015-94, Available at SSRN: https://ssrn.com/abstract=2684649 or http://dx.doi.org/10.17016/FEDS.2015.094

Christoph Boehm (Contact Author)

University of Texas at Austin ( email )

2317 Speedway
Austin, TX 78712
United States

Aaron Flaaen

Board of Governors of the Federal Reserve System ( email )

20th and Constitution Ave., NW
Washington, DC 20551
United States
202-973-7338 (Phone)

HOME PAGE: http://www.federalreserve.gov/econresdata/aaron-b-flaaen.htm

Nitya Pandalai-Nayar

University of Texas at Austin - Department of Economics ( email )

Austin, TX 78712
United States

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