Aggregate Fluctuations and the Network Structure of Intersectoral Trade

Abstract

This paper analyzes and models the flow of intermediate inputs across sectors by adopting a network perspective on sectoral interactions. I apply these tools to show how fluctuations in aggregate economic activity can be obtained from independent shocks to individual sectors. First, by interpreting data in detailed input-use matrices through this lens, I characterize the structure of input trade in the U.S. On the demand side, a typical sector relies on a small number of key inputs and sectors are homogeneous in this respect. However, in their role as input-suppliers sectors do differ: many specialized input suppliers coexist alongside general purpose sectors that function as hubs to the economy. The paper then constructs a network model of input-use matrices that can reproduce these connectivity features in the data. In a standard multisector setup, I then use this model of input-use matrices to provide analytical expressions linking the variability in aggregates to the network structure of input trade. I show that the presence of sectoral hubs -by coupling production decisions across the economy- leads to fluctuations in aggregates. Furthermore, I show that this network approach provides a common framework for hitherto opposing arguments on how fast the volatility of aggregates decays with the number of sectoral technologies.