Network-based macro fluctuations: Evidence from Lithuania

Do inter-sectoral linkages of intermediate products affect the spread of sectoral shocks at the aggregate level in Lithuania, a small and open economy? We answer this question by: i) constructing the domestic sector-by-sector direct requirements table using the Lithuanian interindustry transactions tables, and ii) applying Acemoglu et al. (2012)'s network-based methodology and Gabaix and Ibragimov (2011)'s modified log rank-log size regression to analyse the nature of inter-sectoral linkages. Our results indicate that the direct and indirect inter-sectoral linkages cause aggregate volatility to decay at a rate lower than square root of n - the rate predicted by the standard diversification argument. Furthermore, indirect linkages play an important role in the above-mentioned process, supporting the findings of Acemoglu et al. (2012). These results suggest that the inter-sectoral network of linkages represent a potential propagation mechanism for idiosyncratic shocks throughout the Lithuanian economy.