DP13796 International Comovement in the Global Production Network

Author(s): Zhen Huo, Andrei A. Levchenko, Nitya Pandalai-Nayar
Publication Date: June 2019
Date Revised: February 2020
Keyword(s): international comovement, production networks
JEL(s): F41, F44
Programme Areas: International Macroeconomics and Finance, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13796

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.