International Production Networks and the Propagation of Financial Shocks  

15:30-17:00, Friday, December 22, 2023

I-206, Boxue Building, DUFE

Dr. Sihao Chen is now an Assistant Professor of Economics at Fudan University. He earned his Ph.D. in Economics from HKUST in 2019. His research interests include International Macro and Finance. He has his papers published in Journal of Monetary Economics (*2). 

This paper investigates how external sector-level financial shocks are transmitted to a small open economy through international production networks. Using a multi-sector small open economy model, I show analytically that a financial shock to an external production sector affects downstream sectors (through a price effect) and upstream sectors (through a direct demand effect and a complementarity or substitution effect). These effects work through international production networks, affecting the small country's output and GDP. Quantitatively, I construct U.S. sector-level excess bond premia and estimate key parameters for simulations. The simulation exercises show that U.S. financial shocks account for a significant proportion of the fluctuations in Mexico's GDP during the global financial crisis. International production networks amplify the real effect of external financial shocks by a factor of at least three during the crisis.

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