Sensitivity analysis of shock distributions in the world economy

Abstract

With the ever increasing interconnectedness among countries and industries, globalization has empowered economies and promoted international trade, capital flow and labor mobility, leading to improved products and services. However, the growing interdependence has also propelled an inherent reliance on joint cooperation which has considerably influenced the complexity of global value chains (GVCs). This plays a significant role in policy decisions, raising questions about trade risks that originate from such interdependence. In this paper, we study the impact of network linkage disturbances on the output supply and input demand of countries. We model the network interconnectedness of countries according to the latest 2016 release of the World Input–Output Database (WIOD) that includes data tables for the period 2000-2014 covering 43 countries as well as a model for the Rest of the World (ROW). We assess the shock distributions across the world economy by quantifying the changes in the network linkages using sensitivity analysis. Our contribution is in the definition of a shock tensor with the purpose of evaluating the impact of link sensitivity. The shock tensor is a straightforward yet comprehensive tool that allows us to obtain ample results at various levels of granularity when combining it with aggregation operators. Our study introduces a novel methodology that enables us to acquire input and output link sensitivities for all country pairings when an economic shock initiates or concludes within a country of interest. This innovative approach also facilitates the analysis of evolving trends in these link sensitivities, providing a comprehensive understanding of the dynamics of shock propagation across the global network. Taking advantage of the time-series nature of the WIOD, our results reveal illustrative visualizations and quantative measures that characterize patterns of shock distribution and relationships among countries throughout the period from 2000 to 2014. Our methodology and results not only uncover valuable trends but also establish a structured approach to better understand the aggregate effects of shock distributions. Thus, this study could be helpful for policy makers to assess trade relationships between countries and obtain quantitative insights for making informed decisions as well as explore the overall state of the globalization as a whole.