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Discussion Paper Details

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Title: Financial Constraints and Propagation of Shocks in Production Networks

Author(s): Banu Demir, Beata Javorcik, Tomasz Michalski and Evren Örs

Publication Date: September 2020

Keyword(s): Financing constraints, liquidity, production networks and shock transmission

Programme Area(s): Financial Economics and International Trade and Regional Economics

Abstract: This study finds that even small unexpected supply shocks propagate downstream through production networks and are amplified by firms with short-term financial constraints. The unexpected 2011 increase in the tax on imports purchased with foreign-sourced trade credit is examined using data capturing almost all Turkish supplier-customer links. The identification strategy exploits the heterogeneous impact of the shock on importers. The results indicate that this small shock had a non-trivial economic impact on exposed firms and propagated downstream through affected suppliers. Empirical tests, motivated by a simple theory, demonstrate that low-liquidity firms amplified its transmission.

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Bibliographic Reference

Demir, B, Javorcik, B, Michalski, T and Örs, E. 2020. 'Financial Constraints and Propagation of Shocks in Production Networks'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=15316