Topology-dependence of propagation mechanisms in the production network

TL;DR

This paper investigates how the structure of production networks, influenced by industry interdependence thresholds, affects the propagation of shocks and the accuracy of economic growth models.

Contribution

It demonstrates that varying industry interdependence thresholds significantly alters network topology and core industries, impacting propagation mechanisms in economic modeling.

Findings

Changing thresholds alters network structure and core industries

Network topology influences shock propagation mechanisms

Precise network definition improves industry growth modeling

Abstract

The topology of production networks determines the propagation mechanisms of local shocks and thus the co-movement of industries. As a result, we need a more precisely defined production network to model economic growth accurately. In this study, we analyse Leontief's input-output model from a network theory perspective, aiming to construct a production network in such a way that it allows the most accurate modelling of the propagation mechanisms of changes that generate industry growth. We do this by revisiting a prevalent threshold in the literature that determines industry-industry interdependence. Our hypothesis is that changing the threshold changes the topological structure of the network and the core industries to a large extent. This is significant, because if the production network topology is not precisely defined, the resulting internal propagation mechanisms will be distorted, and thus industry growth modelling will not be accurate. We prove our hypothesis by examining the network topology, and centrality metrics under different thresholds on a network derived from the US input-output accounts data for 2007 and 2012.