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The network origins of aggregate fluctuations

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Author Info

  • Daron Acemoglu
  • Vasco Carvalho

    ()

  • Asuman 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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Bibliographic Info

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 1291.

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Date of creation: Oct 2011
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Handle: RePEc:upf:upfgen:1291

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Web page: http://www.econ.upf.edu/

Related research

Keywords: Business cycle; aggregate volatility; diversification; input-output linkages; intersectoral network; cascades;

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References

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  1. Coralio Ballester & Antoni Calvo-Armengol & Yves Zenou, 2005. "Who's Who in Networks. Wanted: the Key Player," NajEcon Working Paper Reviews 666156000000000586, www.najecon.org.
  2. Xavier Gabaix & Vasco M. Carvalho, 2010. "The Great Diversification and its Undoing," 2010 Meeting Papers 880, Society for Economic Dynamics.
  3. Xavier Gabaix, 2011. "The Granular Origins of Aggregate Fluctuations," Econometrica, Econometric Society, vol. 79(3), pages 733-772, 05.
  4. Antonio Ciccone, 2002. "Input Chains and Industrialization," Review of Economic Studies, Oxford University Press, vol. 69(3), pages 565-587.
  5. 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.
  6. Daron Acemoglu & Asuman Ozdaglar & Alireza Tahbaz-Salehi, 2010. "Cascades in Networks and Aggregate Volatility," NBER Working Papers 16516, National Bureau of Economic Research, Inc.
  7. 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, vol. 119(1), pages 1 - 38.
  8. 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.
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Citations

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Cited by:
  1. di Giovanni, Julian & Levchenko, Andrei A. & Mejean, Isabelle, 2012. "Firms, Destinations, and Aggregate Fluctuations," CEPR Discussion Papers 9168, C.E.P.R. Discussion Papers.
  2. Jonas D. M. Fisher, 2012. "Comment on "The Geography of the Great Recession"," NBER Chapters, in: NBER International Seminar on Macroeconomics 2012 National Bureau of Economic Research, Inc.
  3. Lorenzo Burlon, 2012. "How Do Aggregate Fluctuations Depend on the Network Structure of the Economy?," Working Papers in Economics 278, Universitat de Barcelona. Espai de Recerca en Economia.
  4. Enghin Atalay, 2012. "Materials Prices and Productivity," Working Papers 12-11, Center for Economic Studies, U.S. Census Bureau.

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