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The Great Diversification and Its Undoing

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  • Vasco Carvalho
  • Xavier Gabaix

Abstract

We investigate the hypothesis that macroeconomic fluctuations are primitively the results of many microeconomic shocks. We define fundamental volatility as the volatility that would arise from an economy made entirely of idiosyncratic sectoral or firm-level shocks. Fundamental volatility accounts for the swings in macroeconomic volatility in the major world economies in the past half-century. It accounts for the "great moderation" and its undoing. The initial great moderation is due to a decreasing share of manufacturing between 1975 and 1985. The recent rise of macroeconomic volatility is chiefly due to the growth of the financial sector.

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 103 (2013)
Issue (Month): 5 (August)
Pages: 1697-1727

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Handle: RePEc:aea:aecrev:v:103:y:2013:i:5:p:1697-1727

Note: DOI: 10.1257/aer.103.5.1697
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  1. Xavier Gabaix, 2005. "The Granular Origins of Aggregate Fluctuations," 2005 Meeting Papers 470, Society for Economic Dynamics.
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  1. “The Great Diversification and Its Unraveling,” V. Carvalho and X. Gabaix (2013)
    by afinetheorem in A Fine Theorem on 2013-08-09 22:25:07
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