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Faculty of Economics

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Carvalho, V. M.

From micro to macro via production networks

Journal of Economic Perspectives

Abstract: A modern economy is an intricately linked web of specialized production units, each relying on the flow of inputs from their suppliers to produce their own output which, in turn, is routed towards other downstream units. In this essay, I argue that this network perspective on production linkages can offer novel insights on how local shocks occurring along this production network can propagate across the economy and give rise to aggregate fluctuations. First, I discuss how production networks can be mapped to a standard general equilibrium setup. In particular, through a series of stylized examples, I demonstrate how the propagation of sectoral shocks—and hence aggregate volatility—depends on different arrangements of production, that is, on different "shapes" of the underlying production network. Next I explore, from a network perspective, the empirical properties of a large-scale production network as given by detailed US input-output data. Finally I address how theory and data on production networks can be usefully combined to shed light on comovement and aggregate fluctuations.

Keywords: Production networks, Comovement, Business cycles, Input-Output linkages

JEL Codes: D57, D85, E32, L14

Publisher's Link: http://dx.doi.org/10.1257/jep.28.4.23

Open Data link: https://www.aeaweb.org/jep/data/2804/28040023_data.zip



Cambridge Working Paper in Economics Version of Paper: From Micro to Macro via Production Networks, Carvalho, V. M., (2014)

Papers and Publications



Recent Publications


Carvalho, V. M. and Grassi, B. Large Firm Dynamics and the Business Cycle American Economic Review [2019]

Fruehwirth, J., Iyer, S. and Zhang, A. Religion and Depression in Adolescence Journal of Political Economy, forthcoming [2019]

Faraglia, E., Marcet, A., Oikonomou, R. and Scott, A. Government Debt management: the Short and the Long of it Review of Economic Studies, accepted [2018]