Research
Working papers
- Optimal Trade, Industrial, and Public Policy Mix in Economic Unions with Heterogeneous Locations NBB WP Best Paper Award, CONCORDi 2023
Abstract
We study optimal policy design in a multi-sector, multi-location economy in which a union-level government simultaneously chooses tariffs, industrial subsidies, and public spending. We develop a tractable quantitative general equilibrium framework with input–output linkages, external economies of scale, and heterogeneous locations. Because policy instruments interact endogenously through prices, production networks, and income effects, the planner’s problem is inherently high-dimensional, and the optimal policy depends on the presence and intensity of the others. Our framework extends existing approaches to optimal trade and industrial policy by jointly analyzing multiple policy instruments in a unified equilibrium setting with many heterogeneous locations. Union-level decision making internalizes cross-sectoral and cross-regional spillovers, substantially altering classical optimal policy prescriptions. Using data on 235 EU regions and the rest of the world across 54 sectors, we show that evaluating tariffs, industrial subsidies, or public spending in isolation leads to lower welfare outcomes. Optimal joint policies exhibit strong interactions: trade policy extracts terms-of-trade rents, industrial policy alleviates misallocation and targets upstream sector-locations, and public spending smooths the uneven regional incidence of interventions. These aggregate gains obfuscate substantial heterogeneity across locations, underscoring the importance of accounting for regional inequality when designing optimal policies in an economic union with heterogeneous locations.
- Beyond Firm Size: Network Position and Shock Transmission in Firm-to-Firm Production Networks across Five Economies NBB WP
Abstract
How much a firm’s shocks move the aggregate, and how they propagate to other firms, both depend on its position in the network of firm-to-firm trade. As firm-level networks are available for few economies, quantitative work typically relies on firm size and/or input–output tables as proxies. Using administrative VAT records and tax filings, we build harmonized production networks for five European economies (Belgium, Estonia, Hungary, Italy, and Portugal) and measure firms’ positions directly. Five facts stand out. First, firm size and centrality summarize a firm’s first-order aggregate impact, but not its vertical position along production chains, which is orthogonal to size and governs how shocks propagate across firms. Second, firm size is itself a function of the network: roughly half of within-industry size dispersion reflects the number of customers a firm has, rather than a primitive such as productivity. Third, granularity runs along several dimensions beyond firm size: network sales, transaction values, and the number of customers are heavy-tailed, spanning several orders of magnitude. Fourth, firm-to-firm networks differ structurally from IO tables: they are orders of magnitude sparser, “roundabout” production disappears, and input shares vary widely even within narrow sector pairs. These patterns are stable across all five economies and persist within narrowly defined industries, reflecting firm-level characteristics rather than sectoral composition or country-specific factors. Finally, these distinctions are economically relevant: firm-level responses to monetary policy vary systematically with vertical position, and cross-country differences in where firms sit along production chains generate heterogeneous aggregate responses to a common shock. We provide these moments as calibration targets and as a guide to when sector-level structure is an adequate approximation and when firm-level detail is first-order.
Work in progress
Belgian Regions in Local and Global Value Chains
The Transmission of Euro Area Monetary Policy Shocks in the Belgian Firm-to-Firm Production Network