Uncertainty through the Production Network: Sectoral Origins and Macroeconomic Implications

We study how uncertainty propagates through production networks. First, we construct a highly disaggregated, forward-looking measure of industry-level uncertainty using option-implied volatility data for U.S. firms. Second, we identify the effects of higher uncertainty within industries, across the supply chain, and at the aggregate level. We find that heightened uncertainty in upstream industries (e.g., chemical manufacturing, iron and steel mills) behaves like a negative supply shock—raising prices and lowering employment across the production network. In contrast, greater uncertainty in downstream industries (e.g., automotive manufacturing, insurance carriers) behaves like an adverse demand shock, reducing both prices and employment. At the aggregate level, the inflation response depends on where uncertainty originates within the supply chain. A multi-sector model with time-varying sectoral uncertainty demonstrates that production linkages play a central role in explaining these empirical findings.