Beyond Domar Weights: A New Measure of Systemic Importance in Production Networks

Vol: 
30/2023
Author name: 
Bahal G
Lenzo D
Year: 
2023
Month: 
July
Abstract: 

We present a new measure of producers’ aggregate importance in a production economy with input-output linkages. Unlike existing measures, which capture the impact of an isolated TFP shock to a sector on aggregate output, we quantify how a sector amplifies simultaneous shocks to all producers in the economy. In our context, a sector’s systemic importance reflects its ability to i) directly impact final demand, ii) indirectly affect the production of downstream firms, and iii) amplify shocks originating in other industries. Notably, our measure encompasses and extends an existing notion of centrality in production networks: producers’ Domar weight. Using US input-output data, we find that Domar weights underestimate sectors’ systemic importance by ≈ 50%, on average, and the extent of underestimation increases with the Domar weight of the sector. Additionally, our measure reveals significant changes in key US industries’ aggregate importance over time despite the relative stability of their Domar weights.

Publication file: 

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