Networks and the Macroeconomy: An Empirical Exploration

100 Pages Posted: 10 Dec 2015

See all articles by Daron Acemoglu

Daron Acemoglu

Massachusetts Institute of Technology (MIT) - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Ufuk Akcigit

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER); Center for Economic and Policy Research (CEPR)

William Kerr

Harvard University - Entrepreneurial Management Unit

Date Written: 2015

Abstract

The propagation of macroeconomic shocks through input-output and geographic networks can be a powerful driver of macroeconomic fluctuations. We first exposit that in the presence of Cobb-Douglas production functions and consumer preferences, there is a specific pattern of economic transmission whereby demand-side shocks propagate upstream (to input-supplying industries) and supply-side shocks propagate downstream (to customer industries) and that there is a tight relationship between the direct impact of a shock and the magnitudes of the downstream and the upstream indirect effects. We then investigate the short-run propagation of four different types of industry-level shocks: two demand-side ones (the exogenous component of the variation in industry imports from China and changes in federal spending) and two supply-side ones (TFP shocks and variation in knowledge/ideas coming from foreign patenting). In each case, we find substantial propagation of these shocks through the input-output network, with a pattern broadly consistent with theory. Quantitatively, the network-based propagation is larger than the direct effects of the shocks. We also show quantitatively large effects from the geographic network, capturing the fact that the local propagation of a shock to an industry will fall more heavily on other industries that tend to collocate with it across local markets. Our results suggest that the transmission of various di¤erent types of shocks through economic networks and industry interlinkages could have first-order implications for the macroeconomy.

Keywords: E32, economic fluctuations, geographic collocation, input-output linkages, networks, propagation, shocks

Suggested Citation

Acemoglu, Daron and Akcigit, Ufuk and Kerr, William R., Networks and the Macroeconomy: An Empirical Exploration (2015). Bank of Finland Research Discussion Paper No. 25/2015. Available at SSRN: https://ssrn.com/abstract=2701779

Daron Acemoglu (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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Ufuk Akcigit

University of Chicago - Department of Economics ( email )

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National Bureau of Economic Research (NBER) ( email )

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Center for Economic and Policy Research (CEPR) ( email )

London
United Kingdom

William R. Kerr

Harvard University - Entrepreneurial Management Unit ( email )

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Boston, MA 02163
United States

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