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How U.S. Production Networks Doubled the 2008–09 Financial Shock
Insights from the Field
input-output
Domar weights
TFP
labor wedge
multisector model
1 Text
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Dataverse
'Distortions in Production Networks' was authored by Saki Bigio and Jennifer La'O. It was published by in in .

🧭 What This Paper Asks

How does an economy's production structure shape its macroeconomic response when individual sectors face distortions? The analysis uses a static, multisector framework where production is organized through an input-output network and sectoral production decisions are distorted.

📐 Modeling a Production Network

  • The model is a static multisector framework with production organized by an input-output network.
  • Sectoral distortions enter the model as wedges that affect production decisions.
  • Aggregate effects of these sectoral distortions are shown to operate through two channels: total factor productivity (TFP) and the labor wedge.

🔎 Key Findings

  • Near efficiency (i.e., for small distortions), distortions have zero first-order effects on aggregate TFP.
  • The same near-efficiency distortions produce nonzero first-order effects on the aggregate labor wedge.
  • A sufficient statistic for the aggregate labor-wedge effect of sectoral distortions are the Domar weights.
  • These results imply a Hulten-like theorem for how sectoral distortions map into aggregate outcomes: Domar-weighted sectoral distortions determine first-order impacts on the labor wedge.

📊 Application to the 2008–09 Financial Crisis

  • The model is applied quantitatively to the U.S. input-output structure during the 2008–09 financial crisis.
  • The empirical exercise indicates that the U.S. input-output network amplified financial-sector distortions by roughly a factor of two during the crisis.

💡 Why It Matters

These results clarify when and how sector-level frictions translate into aggregate malaise: near-efficient distortions do not change TFP to first order but do affect labor-market aggregates via Domar-weighted transmission. The amplification found for the 2008–09 crisis highlights the macroeconomic importance of production-network structure for policy responses to sectoral shocks.

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