Essays on Production Networks and International Macroeconomics

Abstract

This dissertation includes three chapters on the role of production networks in (international) macroeconomics.

In the first chapter, ``Inflation in Disaggregated Small Open Economies," I study the consequences of these production networks for our understanding of inflation in small open economies. I show that the production network alters the elasticity of the consumer price index (CPI) to changes in sectoral technology, factor prices, and import prices. Sectors can import and export directly but also indirectly through domestic intermediate input-output linkages. Indirect exporting dampens the inflationary pressure from domestic forces, such as adverse sectoral technology shocks and increases in factor prices. In contrast, indirect importing increases the inflation sensitivity to import price changes. Computing these CPI elasticities requires knowledge of the production network structure as these do not coincide with typical sufficient statistics used in the literature, such as sectoral sales-to-GDP ratios (Domar weights), factor shares, or imported consumption shares. Using input-output tables, I provide empirical evidence that adjusting CPI elasticities for indirect exports and imports matters quantitatively for small open economies. I then use the model to illustrate the importance of production networks during the recent COVID-19 inflation in Chile and the United Kingdom.

In Chapter 2, ``Business Cycle Asymmetry and Input-Output Structure: The Role of Firm-to-Firm Networks" co-authored with Jorge Miranda-Pinto and Eric R. Young, we study the network origins of business cycle asymmetries using cross-country and administrative firm-level data. At the country level, we document that countries with a larger number of non-zero intersectoral linkages (denser networks) display a more negatively skewed cyclical component of output. At the firm level, firms with more suppliers and customers display a more negatively skewed distribution of their output growth. To rationalize these findings, we construct a multisector model with input-output linkages. We show that the relationship between output skewness and network density naturally arises once we consider non-linearities in production. In an economy with low production flexibility, denser production structures imply that relying on more inputs becomes a risk that further amplifies the effects of negative productivity shocks. On the contrary, when firms display high production flexibility, having more inputs to choose from becomes an opportunity to diversify the effects of negative productivity shocks. We calibrate the model using our rich firm-to-firm network Chilean data and show that (i) more connected firms experience larger declines in output in response to a COVID-19 shock, and (ii) the cross-sectional distribution of output growth in the model displays a fatter left tail during downturns. The previous result is shaped by the interplay between production complementarities and network interconnectedness rather than by the asymmetry of the shocks. The size of the shock determines the strength of the relationship between degrees and output decline, highlighting the importance of non-linearities and the limitations of local approximations.

In Chapter 3, ``Commodity Prices and Production Networks in Small Open Economies" co-authored with Petre Caraiani, Jorge Miranda-Pinto, and Juan Olaya-Agudelo, we study the role of domestic production networks in the transmission of commodity price fluctuations in small open economies. We provide empirical evidence of strong propagation of commodity price changes to quantities produced in domestic sectors that supply intermediate inputs to commodity sectors (upstream propagation) and muted propagation to sectors using commodities as intermediate inputs (downstream propagation). We develop a small open economy production network model to explain these transmission patterns. We show that the domestic production network is crucial for shaping the propagation of commodity prices. The two key mechanisms that rationalize the evidence are (i) the foreign demand channel and (ii) the input-output substitution channel. These two channels amplify the upstream propagation of commodity price changes by increasing the demand for non-commodity inputs, and, at the same time, they mitigate the downstream cost channel by allowing firms to use relatively cheaper primary inputs in production.