Galo Nuno, IE University

"Planning against disasters in dynamic production networks"

Abstract

In dynamic multisector economies the planner’s optimal capital allocation can dampen the impact of shocks cascading through nonlinear production networks. In a simple environment, we show analytically that when inputs are complementary and risk aversion is not too low, (i) optimal capital allocation under uncertainty involves deliberately over-investing, relative to the deterministic optimum, in upstream sectors in order to mitigate severe economic downturns; (ii) this strategy can reduce the average level of consumption and give rise to a high welfare cost of business cycles. Deploying novel deep-learning techniques in a general environment, we show quantitatively that: (iii) the ergodic distribution of the simulated nonlinear economy features higher mean capital levels in key upstream sectors, lower mean levels of macroeconomic aggregates, realistic aggregate volatility, and a welfare cost of business cycles nearly 30 times larger when nonlinearities are accounted for.

With Vasco Carvalho and Matias Covarrubias

For more information about Galo Nuño and his interesting work - see his website.

Contact person: Brigitte Hochmuth