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Propagation of economic shocks in input-output networks: A cross-country analysis

Martha G. Alatriste Contreras and Giorgio Fagiolo
Phys. Rev. E 90, 062812 – Published 19 December 2014
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Abstract

This paper investigates how economic shocks propagate and amplify through the input-output network connecting industrial sectors in developed economies. We study alternative models of diffusion on networks and we calibrate them using input-output data on real-world inter-sectoral dependencies for several European countries before the Great Depression. We show that the impact of economic shocks strongly depends on the nature of the shock and country size. Shocks that impact on final demand without changing production and the technological relationships between sectors have on average a large but very homogeneous impact on the economy. Conversely, when shocks change also the magnitudes of input-output across-sector interdependencies (and possibly sector production), the economy is subject to predominantly large but more heterogeneous avalanche sizes. In this case, we also find that (i) the more a sector is globally central in the country network, the larger its impact; (ii) the largest European countries, such as those constituting the core of the European Union's economy, typically experience the largest avalanches, signaling their intrinsic higher vulnerability to economic shocks.

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  • Received 1 April 2014
  • Revised 29 August 2014

DOI:https://doi.org/10.1103/PhysRevE.90.062812

©2014 American Physical Society

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Heavily Interconnected Economies Are Vulnerable to Shocks

Published 19 December 2014

A network analysis finds that the European economies with the most interconnections, like Germany, are the most vulnerable to economic crises in the absence of government intervention.

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Authors & Affiliations

Martha G. Alatriste Contreras*

  • Aix-Marseille School of Economics, CNRS, EHESS, 2 rue de la Charite, 13236 Marseille cedex 02, Marseille, France

Giorgio Fagiolo

  • Institute of Economics, Scuola Superiore Sant'Anna, Piazza Martiri della Libertà 33, 56127 Pisa, Italy

  • *martha.alatriste@ehess.fr
  • giorgio.fagiolo@sssup.it

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Issue

Vol. 90, Iss. 6 — December 2014

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