Production network structure, service share, and aggregate volatility

Abstract

This paper studies differences in production structures across countries and their implications for crosscountry heterogeneity in GDP volatility. In particular, economies with more input-output connections-a denser network-are associated with less concentrated sales shares and lower volatility. The relationship between density and volatility is stronger in countries with a higher share of services in GDP (hereafter referred to as service share). To account for this evidence, I propose a generalized production network model in which denser economies display higher production complexity. If production is also specialized in industries that use labor and intermediates as substitute inputs, higher network density indeed lowers the concentration of sales shares and aggregate volatility. U.S. sectoral data suggest that the elasticity of substitution between labor and intermediates in service sectors is larger than one and larger than in non-service sectors. A calibrated model that then also matches each country's production network can quantitatively generate observed crosscountry empirical patterns. Furthermore, in contrast to previous work, the model predicts that: i) sectoral shocks play only a modest role in accounting for the observed business cycle dynamics, especially in dense and service-oriented economies; and ii) production diversification does not always lower volatility.

Economic Complexity and Poverty in Developing Countries

“…We complement the previous analysis by investigating in this section whether the effect of economic complexity on poverty can translate through the economic growth volatility channel. This is because on the one hand, a recent literature has shown that economic complexity is associated with lower aggregate output volatility (e.g., Güneri and Yalta, 2020;Miranda-Pinto, 2021), lower firms' output volatility (e.g., Maggioni et al, 2016), and dampens economic growth cycles (e.g., Canh and Thanh, 2020). On the other hand, a large body of the literature has now well established that greater macroeconomic volatility (e.g., output volatility) due, inter alia, to external shocks (e.g., financial crises and economic crises such as severe commodity prices shocks) adversely affects poor people, and raises poverty in developing countries 6 .…”

“…human development (e.g., Le Caous and Huarng, 2020), reduce economic growth volatility (e.g., Güneri and Yalta, 2020;Maggioni et al, 2016;Miranda-Pinto, 2021), dampen economic growth cycles (e.g., Canh and Thanh, 2020) and increase labor share notably in the context of (e.g., Arif, 2021).…”

Productive Capacities, Economic Growth and Economic Growth Volatility in Developing Countries: Does Structural Economic Vulnerability Matter?

“…More generally, complex goods, i.e., sophisticated goods are those that have a high knowledge content, i.e., those with a high human capital intensity, (e.g., Bustos et al, 2012;Hausmann and Hidalgo, 2009;Hausmann and Hidalgo, 2011;Hidalgo, 2009). Additionally, some studies (e.g., Güneri and Yalta, 2020;Maggioni et al, 2016;Miranda-Pinto, 2021) have obtained empirically that complex economies 12 experience lower economic growth fluctuations, or lower economic growth cycles (e.g., Canh and Thanh, 2020).…”

Aggregate Implications of Changing Sectoral Trends

“…This paper, therefore, falls partially within the literature on equilibrium multi-sector models first developed by Long and Plosser (1983), and later Horvath (1998Horvath ( , 2000, and Dupor (1999). Since then, a large body of work including Gabaix (2011), Foerster et al (2011, Acemoglu et al (2012), di Giovanni et al (2014), Atalay (2017), Baqaee and Farhi (2017b), Miranda-Pinto (2019), and others have worked out important features of those models for generating aggregate fluctuations from idiosyncratic shocks. 3 In contrast to this literature, the focus herein centers on the implications of production linkages for secular dynamics and the determination of both sectoral and aggregate trend growth rates.…”