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ECO 384G - Business Cycles & Policy

Applications to Macro

Applications to Macro

Ghironi, F., & Melitz, M. J. (2005). International Trade an Macroeconomic Dynamics with Heterogeneous Firms. The Quarterly Journal of Economics, 120(3), 865-915. Retrieved from http://ezproxy.lib.utexas.edu/login?url=https://www.proquest.com/scholarly-journals/international-trade-macroeconomic-dynamics-with/docview/210990573/se-2
Abstract: We develop a stochastic, general equilibrium, two-country model of trade and macroeconomic dynamics. Productivity differs across individual, monopolistically competitive firms in each country. Firms face a sunk entry cost in the domestic market and both fixed and per-unit export costs. Only relatively more productive firms export. Exogenous shocks to aggregate productivity and entry or trade costs induce firms to enter and exit both their domestic and export markets, thus altering the composition of consumption baskets across countries over time. In a world of flexible prices, our model generates endogenously persistent deviations from PPP that would not exists absent our microeconomic structure with heterogeneous firms. It provides an endogendous, microfunded explanation for a Harrod-Balassa-Samuelson effect in response to aggregate productivity differentials and deregulation. Finally, the model successfully matches several moment of U.S. and international business cycles
Boehm, C., Flaaen, A. & Pandalai-Nayar, N. (2014). “Input Linkages and the Transmission of Shocks: Firm-Level Evidence from the 2011 Tohoku Event”  Review of Economics and Statistics https://www.imf.org/external/np/res/seminars/2014/arc/pdf/Boehm_Flaaen_Nayar.pdf

Abstract: Using novel firm-level microdata and leveraging a natural experiment, this paper provides causal evidence for the role of trade and multinational firms in the crosscountry transmission of shocks. Foreign multinational affiliates in the U.S. exhibit substantial intermediate input linkages with their source country. The scope for these linkages to generate cross-country spillovers in the domestic market depends on the elasticity of substitution with respect to other inputs. Using the 2011 T¯ohoku earthquake as an exogenous shock, we estimate this elasticity for those firms most reliant on Japanese imported inputs: the U.S. affiliates of Japanese multinationals. These firms suffered large drops in U.S. output in the months following the shock, roughly one-for-one with the drop in imports and consistent with a Leontief relationship between imported and domestic inputs. Structural estimates of the production function for these firms yield disaggregated production elasticities that are similarly low. Our results suggest that global supply chains are sufficiently rigid to play an important role in the cross-country transmission of shocks.
Huo, Z., Levchenko, A. A., & Pandalai-Nayar, N. (2020). International comovement in the global production network (No. w25978). National Bureau of Economic Research. Retrieved from https://www.nber.org/papers/w25978

Abstract: This paper provides a general and unified framework to study the role of production networks in international GDP co-movement. We first derive an additive decomposition of bilateral GDP co-movement into components capturing shock transmission and shock correlation. We quantify this decomposition in a parsimonious multi-country, multi-sector network propagation model featuring a single composite supply shock, with data for 29 countries and up to 30 years. We find that while the network transmission of shocks is quantitatively important, it accounts for a minority of observed co-movement under a range of standard values of structural elasticities. To assess the role of delayed propagation and intertemporal shocks– features absent in the standard static framework– we extend both the accounting decomposition and the model to a dynamic setting and enrich the space of shocks. Quantitatively, delayed propagation contributes relatively little to the overall GDP co-movement compared to the impact effects captured by the static production network model. Models featuring two intratemporal shocks (TFP and labor supply) strike a good balance between parsimony and fit to the data.
Bonadio, B., Huo, Z., Levchenko, A. A. & Pandalai-Nayar, N. (2020). Global Supply Chains in the Pandemic, National Bureau of Economic Research Working Papers Series, Retrieved from http://www.nber.org/papers/w27224.pdf

Abstract: The study the role of global supply chains in the impact of the Covid-19 pandemic on GDP growth using a multi-sector quantitative framework implemented on 64 countries. We discipline the labor supply shock across sectors and countries using the fraction of work in the sector that can be done from home, interacted with the stringency with which countries imposed lockdown measures. One quarter of the total model-implied real GDP decline is due to transmission through global supply chains. However, “renationalization” of global supply chains does not in general make countries more resilient to pandemic-induced contractions in labor supply. This is because eliminating reliance on foreign inputs increases reliance on the domestic inputs, which are also disrupted due to nationwide lockdowns. In fact, trade can insulate a country imposing a stringent lockdown from the pandemic-shock, as its foreign inputs are less disrupted than its domestic ones. Finally, unilateral lifting of the lockdowns in the largest economies can contribute as much as 2.5%to GDP growth in some of their smaller trade partners.

 

Acemoglu, D., Carvalho, V. M., Ozdaglar, A., & Tahbaz-Salehi, A. (2012). The Network Origins of Aggregate Fluctuations.  Econometrica, 80(5), 1977–2016. http://www.jstor.org/stable/23271439

This paper argues that, in the presence of intersectoral input—output linkages, microeconomic idiosyncratic shocks may lead to aggregate fluctuations. We show that, as the economy becomes more disaggregated, the rate at which aggregate volatility decays is determined by the structure of the network capturing such linkages. Our main results provide a characterization of this relationship in terms of the importance of different sectors as suppliers to their immediate customers, as well as their role as indirect suppliers to chains of downstream sectors. Such higher-order interconnections capture the possibility of "cascade effects" whereby productivity shocks to a sector propagate not only to its immediate downstream customers, but also to the rest of the economy. Our results highlight that sizable aggregate volatility is obtained from sectoral idiosyncratic shocks only if there exists significant asymmetry in the roles that sectors play as suppliers to others, and that the "sparseness" of the input—output matrix is unrelated to the nature of aggregate fluctuations.
 
 
 

 

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