Network Transmission of Fiscal Demand Shocks in Commodity-Dependent Economies

We study how procurement-driven fiscal contractions propagate through firm-to-firm pro- duction networks. The 2014 collapse in oil prices triggered a sharp fall in public procure- ment in Ecuador, generating an externally driven fiscal demand shock. Using administra- tive data covering the universe of formal firms from 2012 to 2019, we link balance sheets, transaction-level buyerseller records, and procurement purchases to construct baseline exposure measures that trace the shock from government contractors to their trading part- ners. Direct suppliers to the State experience persistent declines in revenues of 3.58.6%, labor costs of 4.28.6%, and investment of up to 5.7%. Network structure amplifies these ef- fects: contractors embedded in dense procurement clusters suffer additional revenue losses of 2026% and labor cost reductions of 1114%. Spillovers are economically meaningful: firms with no public contracts but selling to state suppliers experience revenue declines of up to 7.3% and labor cost reductions near 6%. Aggregating these causal estimates im- plies a network-adjusted fiscal multiplier of 1.95: a one-dollar reduction in procurement lowers aggregate value added by $1.95, compared with $1.18 when network propagation is ignored. Production linkages therefore account for about 39% of the total output response.