Upstream, Downstream & Common Firm Shocks
111 Pages Posted: 25 Apr 2022
Date Written: April 2022
We develop a quantitative approach to evaluate the roles of upstream (supplier-to-user), downstream (user-to-supplier) and common factor shock transmission across firms. Inter-firm networks are estimated from U.S. equities over 1989-2017 using machine learning techniques. We then employ a multi-sector DSGE model as a lens through which to interpret them and calculate sectoral exposures from input-output tables. We find that: (i) common factors drive an increasing variance share of returns; (ii) equity return based networks reflect real interconnections across firms, with supplier disruptions being more prominent than downstream exposures; (iii) removing the impact of common factors is increasingly important for revealing inter-firm connections.
Keywords: Firm networks, Upstream versus downstream, Input-output linkages, Shock propagation, Aggregate shocks, Equity returns
JEL Classification: C32, C55, E23, E44, G01
Suggested Citation: Suggested Citation