CAFRAL-SRU Brown Bag Seminar - Shock Diffusion: Does Network Structure Matter?
Speaker(s) Shekhar Tomar, Manager, SRU, Reserve Bank of India Publication CAFRAL Conference room on Mezzanine Floor, Main Building. Reserve Bank of India, Fort, Mumbai 400 001
ABSTRACT

This paper introduces the concept of diffusion of shocks in an input-output production economy. We show that if sectors have different reaction horizons it will lead to diffusion of shocks through the network over time which will prevent the inter-sectoral linkages to form the feedback loop structure essential to generate aggregate volatility. This result is different from other recent papers which have single period model with contemporaneous production linkages between different sectors thus generating sectoral shock amplification as one sector reacts to another contemporaneously, resulting in bigger aggregate fluctuations. In contrast if sectors have different production horizons due to varying complexity of their production process, it would break down the feedback architecture present in single period models. We further show that if the diffusion rate is varied for different sectors, the contribution of network structure to aggregate volatility is more likely to be insignificant. Also, it is no longer sufficient to characterize this contribution of sectoral shocks to aggregate volatility by just looking at the input-output matrix or its summary statistics like degree distribution. In the end, we propose lead time indicator as a possible proxy for measuring differential sectoral diffusion rates.