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The Network Origins of Aggregate Fluctuations

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  • Daron Acemoglu
  • Vasco M. Carvalho
  • Asuman E. Ozdaglar
  • Alireza Tahbaz-Salehi

Abstract

This paper argues that in the presence of intersectoral input-output linkages, microeconomic idiosyncratic shocks may lead to aggregate fluctuations. In particular, it shows that, as the economy becomes more disaggregated, the rate at which aggregate volatility decays is determined by the structure of the network capturing such linkages. Our main results provide a characterization of this relationship in terms of the importance of different sectors as suppliers to their immediate customers as well as their role as indirect suppliers to chains of downstream sectors. Such higher-order interconnections capture the possibility of "cascade effects" whereby productivity shocks to a sector propagate not only to its immediate downstream customers, but also indirectly to the rest of the economy. Our results highlight that sizable aggregate volatility is obtained from sectoral idiosyncratic shocks only if there exists significant asymmetry in the roles that sectors play as suppliers to others, and that the "sparseness" of the input-output matrix is unrelated to the nature of aggregate fluctuations.

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Paper provided by David K. Levine in its series Levine's Working Paper Archive with number 786969000000000359.

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Date of creation: 09 Jan 2012
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Handle: RePEc:cla:levarc:786969000000000359

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  1. Xavier Gabaix & Rustam Ibragimov, 2007. "Rank-1/2: A Simple Way to Improve the OLS Estimation of Tail Exponents," NBER Technical Working Papers 0342, National Bureau of Economic Research, Inc.
  2. Coralio Ballester & Antoni Calvó-Armengol & Yves Zenou, 2004. "Who's Who in Networks. Wanted: The Key Player," Working Papers 178, Barcelona Graduate School of Economics.
  3. Xavier Gabaix, 2011. "The Granular Origins of Aggregate Fluctuations," Econometrica, Econometric Society, Econometric Society, vol. 79(3), pages 733-772, 05.
  4. Xavier Gabaix & Rustam Ibragimov, 2006. "Log(Rank-1/2): A Simple Way to Improve the OLS Estimation of Tail Exponents," Harvard Institute of Economic Research Working Papers 2106, Harvard - Institute of Economic Research.
  5. Carvalho, Vasco M & Gabaix, Xavier, 2010. "The Great Diversification and its Undoing," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8044, C.E.P.R. Discussion Papers.
  6. Antonio Ciccone, 2002. "Input Chains and Industrialization," Review of Economic Studies, Oxford University Press, vol. 69(3), pages 565-587.
  7. Daron Acemoglu & Asuman Ozdaglar & Alireza Tahbaz-Salehi, 2010. "Cascades in Networks and Aggregate Volatility," NBER Working Papers 16516, National Bureau of Economic Research, Inc.
  8. Vasco Carvalho, 2007. "Aggregate fluctuations and the network structure of intersectoral trade," Economics Working Papers 1206, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2010.
  9. Andrew T. Foerster & Pierre-Daniel G. Sarte & Mark W. Watson, 2011. "Sectoral versus Aggregate Shocks: A Structural Factor Analysis of Industrial Production," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 119(1), pages 1 - 38.
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