The Importance of Input-Output Network Structure in the U.S. Economy

Abstract

Hulton’s Theorem argues that in the presence of input-output linkages, the impact of a sector-level shock on the aggregate economy is entirely captured by its size, regardless of its position in the production network. This paper proposes the idea that the production network in isolation represents an essential channel in shaping macroeconomic fluctuations in the United States. First, based on the data from the Bureau of Economic Analysis (BEA) input-output account, this paper shows that as the empirical production network is getting sparser over the past five decades, namely, a majority of industries are dominated by a few central input suppliers, GDP growth tends to decline and is more volatile. Motivated by these facts, this paper embeds the input-output network into a multisector real business cycle model with constant elasticity of substitution (CES) technologies. In order to highlight the role of the input-output network, this paper characterizes sectoral total factor productivity (TFP) shocks’ impact on macroeconomic aggregates nonlinearly. Finally, this paper measures realized sector-level productivity shocks from the data, feeds them into the model, and observes that the calibrated model can quantitatively generate observed empirical patterns. Overall, this paper tests the role of the production network structure in deciding aggregate fluctuations and shows it to be empirically and quantitatively important.