2014/09 | LEM Working Paper Series | |
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Propagation of Economic Shocks in Input-Output Networks: A Cross-Country Analysis
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Martha G. Alatriste Contreras, Giorgio Fagiolo |
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Keywords | ||
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Complex networks, input-output networks, shock diusion, spreading mechanisms, avalances,
economic crises
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Abstract | ||
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This paper investigates how economic shocks propagate and amplify
through the input-output network connecting industrial sectors in
developed economies. We study alternative models of diffusion on
networks and we calibrate them using input-output data on real-world
inter-sectoral dependencies for several European countries before the
Great Depression. We show that the impact of economic shocks strongly
depends on the nature of the shock and country size. Shocks that
impact on final demand without changing production and the
technological relationships between sectors have on average a large
but very homogeneous impact on the economy. Conversely, when shocks
change also the magnitudes of input-output across-sector
interdependencies (and possibly sector production), the economy is
subject to predominantly large but more heterogeneous avalanche
sizes. In this case, we also find that: (i) the more a sector is
globally central in the country network, the largest its impact; (ii)
the largest European countries, such as those constituting the core of
the European Union's economy, typically experience the largest
avalanches, signaling their intrinsic higher vulnerability to economic
shocks.
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