Aggregate fluctuations in adaptive production networks

Abstract

To counteract the adverse effects of shocks, such as the global pandemic, on the economy, governments have discussed policies to improve the resilience of supply chains by reducing dependence on foreign suppliers. In this paper, we develop and quantify an adaptive production network model to study network resilience and the consequences of reshoring of supply chains. In our model, firms exit due to exogenous shocks or the propagation of shocks through the network, while firms can replace suppliers they have lost due to exit subject to switching costs and search frictions. Applying our model to a large international firm-level production network dataset, we find that restricting buyer–supplier links via reshoring policies reduces output and increases volatility and that volatility can be amplified through network adaptivity.