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The Reflection Channel of Shock Transmission in Production Networks

48 Pages Posted: 31 Oct 2017  

Yinan Su

University of Chicago, Booth School of Business, Students; University of Chicago, University of Chicago, Department of Economics, Students

Date Written: October 28, 2017

Abstract

This paper studies the general equilibrium effects of industry-specific productivity shock in an economy in which sectors are connected via input-output linkages. My central finding is productivity shocks do not only travel downstream as is standard in the literature, but also trigger demand change at the final consumption industries, which propagates upstream. I label this novel mechanism "reflection channel". Differences of the elasticity of substitution of consumption and production for the final consumption industries drive the demand change. Empirically, the magnitude of the reflection channel is around three times greater than the previously studied downstream channel. When a positive productivity shock reaches a final consumption industry, consumers substitute towards it much more than producers substitute away, increasing the demand of its upstream industries, and vice versa.

Keywords: Production Network, Shock Transmission, General Equilibrium Effect, Reflection

JEL Classification: C67, D57, E16, E23, E30

Suggested Citation

Su, Yinan, The Reflection Channel of Shock Transmission in Production Networks (October 28, 2017). Available at SSRN: https://ssrn.com/abstract=3060965 or http://dx.doi.org/10.2139/ssrn.3060965

Yinan Su (Contact Author)

University of Chicago, Booth School of Business, Students ( email )

Chicago, IL
United States

University of Chicago, University of Chicago, Department of Economics, Students ( email )

Chicago, IL
United States

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