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Type Working Paper
Scope Discipline-based scholarship
Title Networks and Business Cycles
Organization Unit
Authors
  • Wu Zhu
  • Yucheng Yang
Language
  • English
Institution University of Zurich
Series Name SSRN
Number 3718826
ISSN 1556-5068
Number of Pages 82
Date 2022
Abstract Text The speed at which the US economy has recovered from recessions ranges from months to years. We propose a model incorporating the innovation network, the production network, and cross-sectional shocks and show that their interactions jointly explain large variations in the recovery speed across recessions in the US. In the model, besides the production linkages, firms learn insights on production from each other through the innovation network. We show when the innovation network takes a low-rank structure, there exists one key direction: the impact a shock becomes persistent only if the shock is parallel to this key direction; in contrast, the impact declines quickly if the shock follows other directions. Empirically, we estimate the model in a state-space form and document a set of new stylized facts of the US economy. First, the innovation network among sectors takes a low-rank structure. Second, the innovation network has non-negligible overlap with the production network. Third, recessions with slow recovery are those witnessing sizable negative shock to sectors in the center of the innovation network. Such network structures and the time-varying sectoral distribution of the shocks can well explain the large variation in the recovery speed across recessions in the US. Finally, to emphasize the prevalence of the channel, we explore the application of the theory in asset pricing.
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Digital Object Identifier 10.2139/ssrn.3718826
Other Identification Number merlin-id:24066
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Keywords Business Cycles, Innovation Networks, Production Networks, Sectoral Shock, Persistence, Amplification