Economic contractions are generally associated with increases in NPL ratios. However, despite the common assumption used in the empirical literature of homogenous impact across banks, the strength of this relationship is often bank-specific, and imposing homogeneity may lead to over- or underestimating the resilience of the financial system to macroeconomic woes. We introduce a three-stage approach to generate forecasts of macro-financial variables and project non-performing loans (NPLs) in a way that accounts for banks’ heterogeneous reactions to macro-financial shocks in a dynamic context and for potential cross-sectional dependence across banks caused by common shocks. An application to Ecuador suggests that both substantial heterogeneity and cross-sectional dependence are present and that should be taken into account when trying to anticipate inflections in the quality of the portfolio.

This paper documents that production networks play an essential role in the job search and matching process. We document five facts about worker mobility in production networks using employer–employee data matched with the universe of firm-to-firm transactions for the Dominican Republic: (1) workers move between buyers and suppliers almost twice as much as predicted by standard labour market characteristics, (2) movers between buyers and suppliers experience larger earnings increases than other movers, (3) incumbent workers earnings increase when their firm hires from its buyers or suppliers, (4) firm-to-firm trade increases following supply chain hires, and (5) hiring from buyers or suppliers is associated with stronger firm growth. Survey evidence points to supply chain-specific human capital and better information about job applicants as the main reasons for hiring within the supply chain. These results reveal a new channel through which factors affecting the supply chain, such as international outsourcing or contracting frictions, impact labour markets.