Working Paper: CEPR ID: DP15316
Authors: Banu Demir; Beata Javorcik; Tomasz Michalski; Evren Ors
Abstract: This study finds that even small unexpected supply shocks propagate downstream through production networks and are amplified by firms with short-term financial constraints. The unexpected 2011 increase in the tax on imports purchased with foreign-sourced trade credit is examined using data capturing almost all Turkish supplier-customer links. The identification strategy exploits the heterogeneous impact of the shock on importers. The results indicate that this small shock had a non-trivial economic impact on exposed firms and propagated downstream through affected suppliers. Empirical tests, motivated by a simple theory, demonstrate that low-liquidity firms amplified its transmission.
Keywords: Production networks; Shock transmission; Financing constraints; Liquidity
JEL Codes: F14; F61; G23; L14; E23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| rusf tax increase (H29) | decline in sales for directly exposed firms (L19) |
| rusf tax increase (H29) | decline in sales for indirectly exposed firms (L19) |
| liquidity constraints (E41) | greater decline in sales for affected firms (F61) |