Inventories, Demand Shocks Propagation and Amplification in Supply Chains

I study the role of industries' position in supply chains in shaping the transmission of final demand shocks. First, I use a shift-share design based on destination-specific final demand shocks and destination exposure shares to show that shocks amplify upstream. Quantitatively, upstream industries respond to final demand shocks up to three times as much as final goods producers, in line with the bullwhip effect. To organize the reduced form results, I develop a tractable production network model with inventories and study how the properties of the network and the cyclicality of inventories interact to determine whether final demand shocks amplify or dissipate upstream. I test the mechanism by directly estimating the model-implied relationship between output growth and demand shocks, mediated by network position and inventories. I find evidence of the role of inventories in explaining heterogeneous output elasticities. Finally, I use the model to quantitatively study how inventories and network properties shape the volatility of the economy.