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Microeconomic Origins of Macroeconomic Tail Risks (2014)
BibTeX
@MISC{Acemoglu14microeconomicorigins,
author = {Daron Acemoglu and Asuman Ozdaglar and Alireza Tahbaz-salehi},
title = {Microeconomic Origins of Macroeconomic Tail Risks },
year = {2014}
}
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Abstract
We document that even though the normal distribution is a good approximation to the nature of aggregate fluctuations, it severely underpredicts the frequency of large economic down-turns. We then provide a model that can explain these facts simultaneously. Our model shows that the propagation of microeconomic shocks through input-output linkages can fundamentally reshape the distribution of aggregate output, increasing the likelihood of large downturns (macroeconomic tail risks) from infinitesimal to substantial. For example, an economy subject to thin-tailed micro shocks but with “unbalanced” input-output linkages (where some sectors or firms play a much more important role than others as inputs suppliers to the rest of the economy) may exhibit deep recessions as frequently as economies that are subject to heavy-tailed shocks. This is despite the fact that a central limit theorem-type result would imply that aggregate output is normally distributed. We characterize what types of input-output linkages and distributions of microeconomic shocks lead to sizable macroeconomic tail risks, and also show how the same economic forces cause the output of many sectors to simultaneously fall by large amounts.
Keyphrases
macroeconomic tail risk microeconomic origin input-output linkage aggregate output microeconomic shock important role input supplier economic force large economic down-turns good approximation unbalanced input-output linkage sizable macroeconomic tail risk many sector large downturn thin-tailed micro shock heavy-tailed shock normal distribution large amount aggregate fluctuation central limit theorem-type result deep recession
