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The Network Origins of Large Economic Downturns

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  • Daron Acemoglu
  • Asuman 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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19230.

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Date of creation: Jul 2013
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Handle: RePEc:nbr:nberwo:19230

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Citations

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Cited by:
  1. Julius Bonart & Jean-Philippe Bouchaud & Augustin Landier & David Thesmar, 2014. "Instabilities in large economies: aggregate volatility without idiosyncratic shocks," Papers 1406.5022, arXiv.org.
  2. 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.
  3. 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.
  4. Mizuno, Takayuki & Souma, Wataru & Watanabe, Tsutomu, 2014. "The Structure and Evolution of Buyer-Supplier Networks," Working Paper Series, Center for Interfirm Network, Institute of Economic Research, Hitotsubashi University 27, Center for Interfirm Network, Institute of Economic Research, Hitotsubashi University.

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