Working Paper: NBER ID: w22212
Authors: Saki Bigio; Jennifer Lao
Abstract: How does an economy's production structure determine its macroeconomic response to sectoral distortions? We study a static framework in which production is organized in an input-output network and firms' production decisions are distorted. We show how sectoral distortions manifest at the aggregate level via two channels: total factor productivity and the labor wedge. The strength of each channel depends jointly on the input-output structure and the distribution of shocks. Near efficiency, distortions generate zero first-order effects on TFP but non-zero first-order effects on the labor wedge; the latter we show to be determined by the sector's network "centrality." We apply the model to the 2008-09 Financial Crisis and find that the U.S. input-ouput network may have amplified financial distortions by roughly a factor of two relative to a counterfactual economy devoid of intermediate good trade.
Keywords: Production Networks; Sectoral Distortions; Macroeconomic Response; Total Factor Productivity; Labor Wedge
JEL Codes: C67; E32; E42; G01; G10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| sectoral distortions (L52) | total factor productivity (TFP) (D24) |
| sectoral distortions (L52) | labor wedge (J39) |
| wasted distortions (H21) | total factor productivity (TFP) (D24) |
| wasted distortions (H21) | labor wedge (J39) |
| rebated distortions (H21) | total factor productivity (TFP) (D24) |
| rebated distortions (H21) | labor wedge (J39) |
| centrality of sectors (L52) | labor wedge influence of distortions (J39) |
| financial frictions during the 2008-2009 financial crisis (F65) | amplification of financial distortions (G19) |
| US input-output network (D57) | amplification of financial distortions (G19) |