Discussion Paper Details

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Title: International Comovement in the Global Production Network

Author(s): Zhen Huo, Andrei A. Levchenko and Nitya Pandalai-Nayar

Publication Date: June 2019

Keyword(s): international comovement and production networks

Programme Area(s): International Macroeconomics and Finance and Monetary Economics and Fluctuations

Abstract: This paper provides a general and unified framework to study the role of production networks in international GDP comovement. We first derive an additive decomposition of bilateral GDP comovement into components capturing shock transmission and shock correlation. We quantify this decomposition in a parsimonious multi-country, sector and factor network propagation model featuring a single composite supply shock, with data for 29 countries and up to 30 years. We find that the network transmission of shocks can only account for a minority of observed comovement under a range of standard values of structural elasticities. To assess the role of delayed propagation and intertemporal shocks-- features absent in the standard static framework-- we extend both the accounting decomposition and the model to a dynamic setting and enrich the space of shocks. Quantitatively, delayed propagation contributes relatively little to the overall GDP comovement compared to the impact effects captured by the static production networks model. Models featuring two intratemporal shocks (TFP and labor supply) strike a good balance between parsimony and fit to the data.

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Bibliographic Reference

Huo, Z, Levchenko, A and Pandalai-Nayar, N. 2019. 'International Comovement in the Global Production Network'. London, Centre for Economic Policy Research.