Dynamic Production Networks with Cascading Failures

This paper analyzes a dynamic general equilibrium model featuring input-output linkages, imperfect competition, and external economies of scale with firm entry and exit. We analytically show the interaction between input-output linkages and firm entry and exit augments the amplification of productivity shocks through the elastic labor supply channel additionally. A basic calibration of the dynamic model with cap- ital accumulation shows that output is 30% more volatile in the dynamic production network with cascading failures than without cascading failures