This paper examines the role of firm-to-firm linkages and provides a causal estimate of how destruction of these linkages affects firm performance and prices. Using unique monthly firm-level production network data from Turkey, a country with high inflation and an expansionary monetary policy, I isolate the supply shock by exploiting the disruption of Chinese suppliers during the early lockdown. This study reveals that firms dependent on imports from China raised their prices by 9% in the initial months of disruption, escalating to 26% in the long term. To explore the underlying mechanism, I track the sourcing patterns of these firms and demonstrate that supply chain disruptions compelled firms to substitute their Chinese suppliers with domestic ones. Guided by these empirical findings, I construct a model of endogenous network formation where firms select into domestic and foreign suppliers. In the model, firms that rely on imported inputs benefit from additional input-specific productivity depending on the origin of the supplier. Lastly, I calibrate the model to construct counterfactual supply chains to test the impact of exogenous shocks to sourcing strategies. These simulations reveal how different sourcing patterns influence prices. Moreover, this framework enables the examination of how tariffs and disruptions in the supply chain can impact the aggregate economy.

This study explores the relationship between supply chains and the propagation of producer price shocks. It contributes to the existing literature by identifying an inflation diffusion network that tracks how inflation shocks spread through input-output linkages, with identification relying on variance decompositions of producer prices. The results reveal that industries transmitting inflation shocks are mainly located upstream within the input-output tables, while those receiving inflation shocks correspond to downstream sectors. When industrial policies target upstream industries in South Korea, the diffusion of price shocks is notably higher. To gauge the extent of this propagation, this  study employs regression analysis for each link in the inflation network using the corresponding production network. The findings indicate that domestic supply chains amplify the propagation of inflation shocks by 23%. It also demonstrates the robustness of the analysis by expanding the VAR decomposition to VARX, which accommodates variations in exchange rates and commodity prices.

We obtain measures of demand and supply shock spillovers across the U.S. manufacturing industries using monthly data on industrial production (1976-2022) and producer prices (1947-2022).   Analyzing the spillovers/connectedness measures and the input-output linkages, we find strong evidence that supply shocks propagate downstream through the producer price channel. In contrast, demand shocks propagate upstream through the production channel.  Statistical tests strongly support that the input-output network Granger causes inflation connectedness, especially more significantly during global metal-mineral and oil price hikes. Similarly, the input-output network Granger causes output connectedness, particularly more strongly during U.S. recessions.