Commodity price shocks and production networks

Abstract

This paper studies how different patterns in production networks can help to explain the impact of commodity price shocks on aggregate outcomes. I present a new empirical pattern associated with commodity sectors that I call dependency. This pattern shows that, around a specific commodity sector, there are substantial differences between countries in the number of sectors who directly or indirectly interact with the commodity sector, once only high-intensity interactions are considered. I show that different patterns of dependency can significantly help to explain the impact of commodity price shocks. Using OECD data, I found that the influence of the commodity sector as a buyer within the network plays an important role in the propagation of commodity price shocks. Once controlling for network measures associated specifically with the commodity sector, general network measures such as density or sparcity do not play a role in propagation. Then, I introduce the dependency pattern in a novel network model from Caraiani et al. (forthcomming) to evaluate counterfactual scenarios around commodity price shocks. I interchange the dependency pattern between the Chilean and Australian networks and show that, after imposing Chile’s dependency pattern on Australia, commodity price shocks have a greater impact on Australia and vice versa. Theoretical results are consistent with empirical findings.