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The Network Origins of Large Economic Downturns

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  • Daron Acemoglu
  • Asuman E. Ozdaglar
  • Alireza Tahbaz-Salehi

Abstract

This paper shows that large economic downturns may result from the propagation of microeconomic shocks over the input-output linkages across different firms or sectors within the economy. Building on the framework of Acemoglu et al. (2012), we argue that the economy’s input-output structure can fundamentally reshape the distribution of aggregate output, increasing the likelihood of large downturns from infinitesimal to substantial. More specifically, we show that an economy with non-trivial intersectoral input-output linkages that is subject to thin-tailed productivity shocks may exhibit deep recessions as frequently as economies that are subject to heavy-tailed shocks. Moreover, we show that in the presence of input-output linkages, aggregate volatility is not necessarily a sufficient statistic for the likelihood of large downturns. Rather, depending on the shape of the distribution of the idiosyncratic shocks, different features of the economy’s input-output network may be of first-order importance. Finally, our results establish that the effects of the economy’s input-output structure and the nature of the idiosyncratic firm-level shocks on aggregate output are not separable, in the sense that the likelihood of large economic downturns is determined by the interplay between the two.

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Paper provided by David K. Levine in its series Levine's Working Paper Archive with number 786969000000000944.

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Date of creation: 24 Feb 2014
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Handle: RePEc:cla:levarc:786969000000000944

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  1. 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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  8. Long, John B, Jr & Plosser, Charles I, 1983. "Real Business Cycles," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(1), pages 39-69, February.
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  13. Bernanke, Ben & Gertler, Mark & Gilchrist, Simon, 1996. "The Financial Accelerator and the Flight to Quality," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 1-15, February.
  14. Daron Acemoglu & Vasco Carvalho & Asuman Ozdaglar & Alireza Tahbaz-Salehi, 2011. "The Network Origins of Aggregate Fluctuations," Working Papers 587, Barcelona Graduate School of Economics.
  15. Nirei, Makoto, 2006. "Threshold behavior and aggregate fluctuation," Journal of Economic Theory, Elsevier, Elsevier, vol. 127(1), pages 309-322, March.
  16. Milton Friedman & Anna J. Schwartz, 1963. "A Monetary History of the United States, 1867-1960," NBER Books, National Bureau of Economic Research, Inc, National Bureau of Economic Research, Inc, number frie63-1.
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  18. Barro, Robert, 2006. "Rare Disasters and Asset Markets in the Twentieth Century," Scholarly Articles 3208215, Harvard University Department of Economics.
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Citations

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Cited by:
  1. Giorgio Fagiolo & Gianluca Santoni, 2014. "Human-Mobility Networks, Country Income, and Labor Productivity," LEM Papers Series, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy 2014/08, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  2. Takayuki Mizuno & Wataru Souma & Tsutomu Watanabe, 2014. "The Structure and Evolution of Buyer-Supplier Networks," CARF F-Series, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo CARF-F-339, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
  3. Mizuno, Takayuki & Souma, Wataru & Watanabe, Tsutomu, 2014. "The Structure and Evolution of Buyer-Supplier Networks," Working Paper Series 27, Center for Interfirm Network, Institute of Economic Research, Hitotsubashi University.
  4. Julius Bonart & Jean-Philippe Bouchaud & Augustin Landier & David Thesmar, 2014. "Instabilities in large economies: aggregate volatility without idiosyncratic shocks," Papers 1406.5022, arXiv.org.

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