1932

Abstract

This article reviews a framework for studying the aggregation and propagation of microeconomic shocks in general equilibrium. We discuss the determinants of aggregate measures of real economic activity, like real GDP, real domestic absorption, and aggregate productivity in both efficient and inefficient environments. We also discuss how shocks from one set of producers are transmitted to other producers through prices and quantities. The framework we provide is amenable to generalization and can be used to study any collection of producers ranging from one isolated producer to an industry consisting of heterogeneous producers to an entire economy. We conclude with a brief survey of some of the applied questions that can be addressed using the analytical tools presented in this review and avenues for future work.

[Erratum, Closure]

An erratum has been published for this article:
Erratum: Micro Propagation and Macro Aggregation
Loading

Article metrics loading...

/content/journals/10.1146/annurev-economics-082322-012833
2023-09-13
2024-10-03
Loading full text...

Full text loading...

/deliver/fulltext/economics/15/1/annurev-economics-082322-012833.html?itemId=/content/journals/10.1146/annurev-economics-082322-012833&mimeType=html&fmt=ahah

Literature Cited

  1. Acemoglu D, Akcigit U, Kerr W. 2016.. Networks and the macroeconomy: an empirical exploration. . NBER Macroecon. Annu. 30::273335
    [Google Scholar]
  2. Acemoglu D, Carvalho V, Ozdaglar A, Tahbaz-Salehi A. 2012.. The network origins of aggregate fluctuations. . Econometrica 80:(5):19772016
    [Google Scholar]
  3. Acemoglu D, Ozdaglar A, Tahbaz-Salehi A. 2017.. Microeconomic origins of macroeconomic tail risks. . Am. Econ. Rev. 107:(1):54108
    [Google Scholar]
  4. Arkolakis C, Huneeus F, Miyauchi Y. 2021.. Spatial production networks. Unpublished manuscript, Yale Univ., New Haven, CT:
    [Google Scholar]
  5. Atalay E. 2017.. How important are sectoral shocks?. Am. Econ. J. Macroecon. 9:(4):25480
    [Google Scholar]
  6. Atkin D, Donaldson D. 2021.. The role of trade in economic development. NBER Work. Pap. 29314
    [Google Scholar]
  7. Bachmann R, Baqaee DR, Bayer C, Kuhn M, Löschel A, et al. 2022.. What if? The economic effects for Germany of a stop of energy imports from Russia. Policy Rep. 36, CESifo, Munich, Ger:
    [Google Scholar]
  8. Baqaee DR. 2018.. Cascading failures in production networks. . Econometrica 86:(5):181938
    [Google Scholar]
  9. Baqaee DR, Burstein AT. 2021.. Welfare and output with income effects and taste shocks. NBER Work. Pap. 28754
    [Google Scholar]
  10. Baqaee DR, Burstein AT, Duprez C, Farhi E. 2022.. Supplier churn and growth: a micro-to-macro analysis. Tech. Rep., Univ. Calif., Los Angeles:
    [Google Scholar]
  11. Baqaee DR, Farhi E. 2018.. Macroeconomics with heterogeneous agents and input-output networks. NBER Work. Pap. 24684
    [Google Scholar]
  12. Baqaee DR, Farhi E. 2019a.. Networks, barriers, and trade. NBER Work. Pap. 26108
    [Google Scholar]
  13. Baqaee DR, Farhi E. 2019b.. The macroeconomic impact of microeconomic shocks: beyond Hulten's theorem. . Econometrica 87:(4):1155203
    [Google Scholar]
  14. Baqaee DR, Farhi E. 2020a.. Entry vs. rents: aggregation with economies of scale. NBER Work. Pap. 27140
    [Google Scholar]
  15. Baqaee DR, Farhi E. 2020b.. Productivity and misallocation in general equilibrium. . Q. J. Econ. 135:(1):10563
    [Google Scholar]
  16. Baqaee DR, Farhi E. 2020c.. Supply and demand in disaggregated Keynesian economies with an application to the COVID-19 crisis. NBER Work. Pap. 27152
    [Google Scholar]
  17. Baqaee DR, Farhi E, Sangani K. 2021.. The supply-side effects of monetary policy. NBER Work. Pap. 28345
    [Google Scholar]
  18. Barrot JN, Sauvagnat J. 2016.. Input specificity and the propagation of idiosyncratic shocks in production networks. . Q. J. Econ. 131:(3):154392
    [Google Scholar]
  19. Basu S. 1995.. Intermediate goods and business cycles: implications for productivity and welfare. . Am. Econ. Rev. 85:(3):51231
    [Google Scholar]
  20. Basu S, Fernald JG. 1997.. Returns to scale in U.S. production: estimates and implications. . J. Political Econ. 105:(2):24983
    [Google Scholar]
  21. Basu S, Pascali L, Schiantarelli F, Serven L. 2022.. Productivity and the welfare of nations. . J. Eur. Econ. Assoc. 20:(4):164782
    [Google Scholar]
  22. Bau N, Matray A. 2020.. Misallocation and capital market integration: evidence from India. NBER Work. Pap. 27955
    [Google Scholar]
  23. Bernard AB, Moxnes A. 2018.. Networks and trade. . Annu. Rev. Econ. 10::6585
    [Google Scholar]
  24. Bigio S, La'O J. 2020.. Distortions in production networks. . Q. J. Econ. 135:(4):2187253
    [Google Scholar]
  25. Blanchard O, Gali J. 2007.. Real wage rigidities and the new Keynesian model. . J. Money Credit Bank. 39:(s1):3565
    [Google Scholar]
  26. Blanchard OJ, Kiyotaki N. 1987.. Monopolistic competition and the effects of aggregate demand. . Am. Econ. Rev. 77:(4):64766
    [Google Scholar]
  27. Boehm C, Flaaen A, Pandalai-Nayar N. 2019.. Input linkages and the transmission of shocks: firm-level evidence from the 2011 Tōhoku earthquake. . Rev. Econ. Stat. 101:(1):6075
    [Google Scholar]
  28. Boehm J, Oberfield E. 2020.. Misallocation in the market for inputs: enforcement and the organization of production. . Q. J. Econ. 135:(4):200758
    [Google Scholar]
  29. Burstein A, Carvalho V, Grassi B. 2020.. Bottom-up markup fluctuations. NBER Work. Pap. 27958
    [Google Scholar]
  30. Burstein A, Cravino J. 2015.. Measured aggregate gains from international trade. . Am. Econ. J. Macroecon. 7:(2):181218
    [Google Scholar]
  31. Carvalho C. 2006.. Heterogeneity in price stickiness and the real effects of monetary shocks. . Front. Macroecon. 2:(1). https://doi.org/10.2202/1534-6021.1320
    [Google Scholar]
  32. Carvalho VM, Grassi B. 2019.. Large firm dynamics and the business cycle. . Am. Econ. Rev. 109:(4):1375425
    [Google Scholar]
  33. Carvalho VM, Nirei M, Saito Y, Tahbaz-Salehi A. 2021.. Supply chain disruptions: evidence from the Great East Japan Earthquake. . Q. J. Econ. 136:(2):1255321
    [Google Scholar]
  34. Carvalho VM, Tahbaz-Salehi A. 2019.. Production networks: a primer. . Annu. Rev. Econ. 11::63563
    [Google Scholar]
  35. Castro N. 2019.. The importance of production networks and sectoral heterogeneity for monetary policy. Unpublished manuscript, Univ. Md., College Park
    [Google Scholar]
  36. Chaney T. 2014.. The network structure of international trade. . Am. Econ. Rev. 104:(11):360034
    [Google Scholar]
  37. Costinot A, Rodriguez-Clare A. 2014.. Trade theory with numbers: quantifying the consequences of globalization. . In Handbook of International Economics 4, ed. G Gopinath, E Helpman, K Rogoff , pp. 197261 Amsterdam:: Elsevier
    [Google Scholar]
  38. Dew-Becker I. 2022.. Tail risk in production networks. NBER Work. Pap. 30479
    [Google Scholar]
  39. Dew-Becker I, Tahbaz-Salehi A, Vedolin A. 2021.. Skewness and time-varying second moments in a nonlinear production network: theory and evidence. NBER Work. Pap. 29499
    [Google Scholar]
  40. Dhyne E, Kikkawa AK, Magerman G. 2022.. Imperfect competition in firm-to-firm trade. . J. Eur. Econ. Assoc. 20:(5):193370
    [Google Scholar]
  41. Dhyne E, Kikkawa AK, Mogstad M, Tintelnot F. 2021.. Trade and domestic production networks. . Rev. Econ. Stud. 88:(2):64368
    [Google Scholar]
  42. di Giovanni J, Levchenko AA, Mejean I. 2018.. The micro origins of international business-cycle comovement. . Am. Econ. Rev. 108:(1):82108
    [Google Scholar]
  43. Domar ED. 1961.. On the measurement of technological change. . Econ. J. 71:(284):70929
    [Google Scholar]
  44. Edmond C, Midrigan V, Xu DY. 2015.. Competition, markups, and the gains from international trade. . Am. Econ. Rev. 105:(10):3183221
    [Google Scholar]
  45. Edmond C, Midrigan V, Xu DY. 2018.. How costly are markups? NBER Work. Pap. 24800
    [Google Scholar]
  46. Elliott M, Golub B. 2022.. Networks and economic fragility. . Annu. Rev. Econ. 14:66596
    [Google Scholar]
  47. Elliott M, Golub B, Leduc MV. 2022.. Supply network formation and fragility. . Am. Econ. Rev. 112(8):270147
    [Google Scholar]
  48. Flynn JP, Patterson C, Sturm J. 2021.. Fiscal policy in a networked economy. NBER Work. Pap. 29619
    [Google Scholar]
  49. Foerster A, Hornstein A, Sarte PD, Watson M. 2019.. Aggregate implications of changing sectoral trends. Work. Pap. 2019-16 , Fed. Reserve Bank San Francisco, San Francisco
    [Google Scholar]
  50. Foerster AT, Sarte PDG, Watson MW. 2011.. Sectoral versus aggregate shocks: a structural factor analysis of industrial production. . J. Political Econ. 119:(1):138
    [Google Scholar]
  51. Gabaix X. 2011.. The granular origins of aggregate fluctuations. . Econometrica 79:(3):73372
    [Google Scholar]
  52. Gopinath G, Kalemli-Ozcan S, Karabarbounis L, Villegas-Sanchez C. 2017.. Capital allocation and productivity in South Europe. . Q. J. Econ. 132:(4):191567
    [Google Scholar]
  53. Grassi B. 2017.. IO in I-O: competition and volatility in input-output networks. 2017 Meet. Pap. 1637 , Soc. Econ. Dyn., Minneapolis, MN:
    [Google Scholar]
  54. Guerrieri V, Lorenzoni G, Straub L, Werning I. 2020.. Macroeconomic implications of COVID-19: Can negative supply shocks cause demand shortages? NBER Work. Pap. 26918
    [Google Scholar]
  55. Hall RE. 1990.. Invariance properties of Solow's productivity residual. . In Growth, Productivity, Unemployment: Essays to Celebrate Bob Solow's Birthday, ed. PA Diamond , pp. 71112 Cambridge, MA:: MIT Press
    [Google Scholar]
  56. Harberger AC. 1964.. The measurement of waste. . Am. Econ. Rev. 54:(3):5876
    [Google Scholar]
  57. Hsieh CT, Klenow PJ. 2009.. Misallocation and manufacturing TFP in China and India. . Q. J. Econ. 124:(4):140348
    [Google Scholar]
  58. Hulten CR. 1973.. Divisia index numbers. . Econometrica 41:(6):101725
    [Google Scholar]
  59. Hulten CR. 1978.. Growth accounting with intermediate inputs. . Rev. Econ. Stud. 45:(3):51118
    [Google Scholar]
  60. Huneeus F. 2018.. Production network dynamics and the propagation of shocks. Job Mark. Pap., Princeton Univ., Princeton, NJ:
    [Google Scholar]
  61. Huo Z, Levchenko AA, Pandalai-Nayar N. 2019.. International comovement in the global production network. NBER Work. Pap. 25978
    [Google Scholar]
  62. Jones CI. 2011.. Misallocation, economic growth, and input-output economics. NBER Work. Pap. 16742
    [Google Scholar]
  63. Kehoe TJ, Ruhl KJ. 2008.. Are shocks to the terms of trade shocks to productivity?. Rev. Econ. Dyn. 11:(4):80419
    [Google Scholar]
  64. Kleinman B, Liu E, Redding SJ. 2021.. Dynamic spatial general equilibrium. NBER Work. Pap. 29101
    [Google Scholar]
  65. Kopytov A, Nimark K, Mishra B, Taschereau-Dumouchel M. 2022.. Endogenous production networks under supply chain uncertainty. Unpublished manuscript, Cornell Univ., Ithaca, NY:
    [Google Scholar]
  66. La'O J, Bigio S. 2020.. Distortions in production networks. . Q. J. Econ. 135:(4):2187253
    [Google Scholar]
  67. La'O J, Tahbaz-Salehi A. 2022.. Optimal monetary policy in production networks. . Econometrica 90:(3):1295336
    [Google Scholar]
  68. Levinsohn J, Petrin A. 2003.. Estimating production functions using inputs to control for unobservables. . Rev. Econ. Stud. 70:(2):31741
    [Google Scholar]
  69. Lim K. 2017.. Endogenous production networks and the business cycle. Work. Pap., Univ. Toronto, Toronto:
    [Google Scholar]
  70. Liu E. 2019.. Industrial policies in production networks. . Q. J. Econ. 134:(9):1883948
    [Google Scholar]
  71. Liu E, Tsyvinski A. 2020.. Dynamical structure and spectral properties of input-output networks. NBER Work. Pap. 28178
    [Google Scholar]
  72. Long JB, Plosser CI. 1983.. Real business cycles. . J. Political Econ. 91:(1):3969
    [Google Scholar]
  73. Magerman G, De Bruyne K, Dhyne E, Van Hove J. 2016.. Heterogeneous firms and the micro origins of aggregate fluctuations. Work. Pap. Res. 312 , Natl. Bank Belg., Brussels:
    [Google Scholar]
  74. McKenzie L. 1951.. Ideal output and the interdependence of firms. . Econ. J. 61:(244):785803
    [Google Scholar]
  75. Meier M, Reinelt T. 2020.. Monetary policy, markup dispersion, and aggregate TFP. ECB Work. Pap. Ser. 2427 , Eur. Cent. Bank, Frankfurt, Ger:
    [Google Scholar]
  76. Nakamura E, Steinsson J. 2010.. Monetary non-neutrality in a multisector menu cost model. . Q. J. Econ. 125:(3):9611013
    [Google Scholar]
  77. Oberfield E. 2018.. A theory of input-output architecture. . Econometrica 86:(2):55989
    [Google Scholar]
  78. Osotimehin S, Popov L. 2020.. Misallocation and intersectoral linkages. Inst. Work. Pap. 30 , Fed. Reserve Bank Minneapolis, Minneapolis, MN:
    [Google Scholar]
  79. Pasten E, Schoenle R, Weber M. 2017.. Price rigidity and the origins of aggregate fluctuations. NBER Work. Pap. 23750
    [Google Scholar]
  80. Pasten E, Schoenle R, Weber M. 2018.. The propagation of monetary policy shocks in a heterogeneous production economy. NBER Work. Pap. 25303
    [Google Scholar]
  81. Restuccia D, Rogerson R. 2008.. Policy distortions and aggregate productivity with heterogeneous establishments. . Rev. Econ. Dyn. 11:(4):70720
    [Google Scholar]
  82. Restuccia D, Rogerson R. 2013.. Misallocation and productivity. . Rev. Econ. Dyn. 16:(1):110
    [Google Scholar]
  83. Restuccia D, Rogerson R. 2017.. The causes and costs of misallocation. . J. Econ. Perspect. 31:(3):15174
    [Google Scholar]
  84. Rubbo E. 2020.. Networks, Phillips curves, and monetary policy. Unpublished manuscript, Harvard Univ., Cambridge, MA:
    [Google Scholar]
  85. Rubbo E. 2022.. Monetary non-neutrality in the cross-section. Unpublished manuscript, Harvard Univ., Cambridge, MA:
    [Google Scholar]
  86. Solow RM. 1957.. Technical change and the aggregate production function. . Rev. Econ. Stat. 39:(3):31220
    [Google Scholar]
  87. Taschereau-Dumouchel M. 2020.. Cascades and fluctuations in an economy with an endogenous production network. Unpublished manuscript, Cornell Univ., Ithaca, NY:
    [Google Scholar]
  88. Vollrath D. 2021.. The elasticity of aggregate output with respect to capital and labor. Unpublished manuscript, Univ. Houston, Houston, TX:
    [Google Scholar]
  89. vom Lehn C, Winberry T. 2021.. The investment network, sectoral comovement, and the changing U.S. business cycle. . Q. J. Econ. 137:(1):387433
    [Google Scholar]
/content/journals/10.1146/annurev-economics-082322-012833
Loading
/content/journals/10.1146/annurev-economics-082322-012833
Loading

Data & Media loading...

Supplementary Data

  • Article Type: Review Article
This is a required field
Please enter a valid email address
Approval was a Success
Invalid data
An Error Occurred
Approval was partially successful, following selected items could not be processed due to error