International Comovement in the Global Production Network

73 Pages Posted: 26 Jun 2019

See all articles by Zhen Huo

Zhen Huo

Yale University - Department of Economics

Andrei A. Levchenko

University of Michigan - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Nitya Pandalai-Nayar

University of Texas at Austin - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: June 2019

Abstract

This paper provides a general and unified framework to study the role of production networks in international GDP comovement. We first derive an additive decomposition of bilateral GDP comovement into components capturing shock transmission and shock correlation. We quantify this decomposition in a parsimonious multi-country, sector and factor network propagation model featuring a single composite supply shock, with data for 29 countries and up to 30 years. We find that the network transmission of shocks can only account for a minority of observed comovement under a range of standard values of structural elasticities. To assess the role of delayed propagation and intertemporal shocks– features absent in the standard static framework– we extend both the accounting decomposition and the model to a dynamic setting and enrich the space of shocks. Quantitatively, delayed propagation contributes relatively little to the overall GDP comovement compared to the impact effects captured by the static production networks model. Models featuring two intratemporal shocks (TFP and labor supply) strike a good balance between parsimony and fit to the data.

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Suggested Citation

Huo, Zhen and Levchenko, Andrei A. and Pandalai-Nayar, Nitya, International Comovement in the Global Production Network (June 2019). NBER Working Paper No. w25978, Available at SSRN: https://ssrn.com/abstract=3408910

Zhen Huo (Contact Author)

Yale University - Department of Economics ( email )

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Andrei A. Levchenko

University of Michigan - Department of Economics ( email )

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Ann Arbor, MI 48109-1220
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HOME PAGE: http://alevchenko.com

National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Nitya Pandalai-Nayar

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

Austin, TX 78712
United States

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