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International Comovement in the Global Production Network

Author

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  • Levchenko, Andrei
  • Huo, Zhen
  • Pandalai-Nayar, Nitya
Abstract
This paper provides a general 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, multi-sector dynamic network propagation model, using data for the G7 countries over the period 1978-2007. Our main finding is that while the network transmission of shocks is quantitatively important, it accounts for a minority of observed comovement under the estimated range of structural elasticities. Contemporaneous responses to correlated shocks in the production network are more successful at generating comovement than intertemporal propagation through capital accumulation. Extensions with multiple shocks, nominal rigidities, and international financial integration leave our main result unchanged. A combination of TFP and labor supply shocks is quantitatively successful at reproducing the observed international business cycle.

Suggested Citation

  • Levchenko, Andrei & Huo, Zhen & Pandalai-Nayar, Nitya, 2019. "International Comovement in the Global Production Network," CEPR Discussion Papers 13796, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:13796
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    Cited by:

    1. Jongrim Ha & M. Ayhan Kose & Christopher Otrok & Eswar S. Prasad, 2020. "Global macro-financial cycles and spillovers," CAMA Working Papers 2020-12, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    2. Jean Imbs & Laurent L. Pauwels, 2020. "High Order Openness," Working Papers 20200047, New York University Abu Dhabi, Department of Social Science, revised Jun 2020.
    3. Anagnostopoulos, Alexios & Atesagaoglu, Orhan Erem & Faraglia, Elisa & Giannitsarou, Chryssi, 2022. "Cross country stock market comovement: A macro perspective," Journal of Monetary Economics, Elsevier, vol. 130(C), pages 34-48.
    4. Bonadio, Barthélémy & Huo, Zhen & Levchenko, Andrei A. & Pandalai-Nayar, Nitya, 2021. "Global supply chains in the pandemic," Journal of International Economics, Elsevier, vol. 133(C).
    5. Huo, Zhen & Levchenko, Andrei A. & Pandalai-Nayar, Nitya, 2023. "Utilization-adjusted TFP across countries: Measurement and implications for international comovement," Journal of International Economics, Elsevier, vol. 146(C).
    6. Benny Kleinman & Ernest Liu & Stephen J. Redding, 2024. "International Friends and Enemies," American Economic Journal: Macroeconomics, American Economic Association, vol. 16(4), pages 350-385, October.
    7. Yuzuka Kashiwagi & Yasuyuki Todo & Petr Matous, 2021. "Propagation of economic shocks through global supply chains—Evidence from Hurricane Sandy," Review of International Economics, Wiley Blackwell, vol. 29(5), pages 1186-1220, November.
    8. Julian di Giovanni & Andrei A. Levchenko & Isabelle Mejean, 2024. "Foreign Shocks as Granular Fluctuations," Journal of Political Economy, University of Chicago Press, vol. 132(2), pages 391-433.
    9. de Soyres, François & Gaillard, Alexandre, 2022. "Global trade and GDP comovement," Journal of Economic Dynamics and Control, Elsevier, vol. 138(C).
    10. Campos, Rodolfo G. & Estefania-Flores, Julia & Furceri, Davide & Timini, Jacopo, 2023. "Geopolitical fragmentation and trade," Journal of Comparative Economics, Elsevier, vol. 51(4), pages 1289-1315.
    11. Julian Di Giovanni & Galina Hale, 2022. "Stock Market Spillovers via the Global Production Network: Transmission of U.S. Monetary Policy," Journal of Finance, American Finance Association, vol. 77(6), pages 3373-3421, December.
    12. Peter Eppinger & Gabriel J. Felbermayr & Oliver Krebs & Bohdan Kukharskyy, 2021. "Decoupling Global Value Chains," CESifo Working Paper Series 9079, CESifo.
    13. Bosker, Maarten & Westbrock, Bastian, 2024. "The network origins of the gains from trade," Journal of Economic Theory, Elsevier, vol. 216(C).
    14. Haishi Li, 2023. "Multinational Production and Global Shock Propagation during the Great Recession," CESifo Working Paper Series 10349, CESifo.
    15. Milan Deskar-Škrbić & Davor Kunovac, 2020. "Twentieth Anniversary of the Euro: Why are Some Countries Still Not Willing to Join? Economists’ View," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 62(2), pages 242-262, June.
    16. Daoju Peng & Kang Shi & Juanyi Xu, 2020. "Global Value Chain and Business Cycle Comovement: Does Distance Matter?," HKUST CEP Working Papers Series 202005, HKUST Center for Economic Policy.
    17. Paul Ilhak Ko, 2020. "Dissecting Trade and Business Cycle Co-movement," 2020 Papers pko1026, Job Market Papers.

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    More about this item

    Keywords

    Production networks; International comovement;

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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