IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/11845.html
   My bibliography  Save this paper

The Macroeconomic Impact of Microeconomic Shocks: Beyond Hulten's Theorem

Author

Listed:
  • Baqaee, David Rezza
  • Farhi, Emmanuel

Abstract

We provide a nonlinear characterization of the macroeconomic impact of microeconomic TFP shocks in terms of reduced-form non-parametric elasticities for efficient economies. We also provide the mapping from structural parameters to these reduced-form elasticities, under general equilibrium. In this sense, the paper extends the foundational theorem of Hulten (1978) beyond first-order terms to capture nonlinearities. Key features ignored by first-order approximations that play a crucial role are: structural elasticities of substitution, network linkages, structural returns to scale, and the degree to which factors can be reallocated. Higher-order terms are large and economically interesting: they magnify negative shocks and attenuate positive shocks, resulting in an output distribution that is asymmetric (negative skewness), fat-tailed (excess kurtosis), and has a lower mean. They explain how small microeconomic shocks to critical sectors can have a large macroeconomic impact. To give a sense of magnitudes: in our benchmark calibration, output losses due to business cycle fluctuations are 0.6% of GDP, an order of magnitude larger than the cost of business cycles calculated by Lucas (1987), and are entirely due to a reduction in the mean of GDP because of nonlinearities in production; and accounting for second order terms increases the estimated impact of the price shock to the critical sector of oil in the 1970s from 0.7% to 2.4% of world GDP.

Suggested Citation

  • Baqaee, David Rezza & Farhi, Emmanuel, 2017. "The Macroeconomic Impact of Microeconomic Shocks: Beyond Hulten's Theorem," CEPR Discussion Papers 11845, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:11845
    as

    Download full text from publisher

    File URL: http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=11845
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. David H. Autor & David Dorn & Gordon H. Hanson, 2016. "The China Shock: Learning from Labor-Market Adjustment to Large Changes in Trade," Annual Review of Economics, Annual Reviews, vol. 8(1), pages 205-240, October.
    2. 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.
    3. Daron Acemoglu & Asuman Ozdaglar & Alireza Tahbaz-Salehi, 2017. "Microeconomic Origins of Macroeconomic Tail Risks," American Economic Review, American Economic Association, vol. 107(1), pages 54-108, January.
    4. repec:aea:aejmac:v:9:y:2017:i:4:p:254-80 is not listed on IDEAS
    5. repec:jct:journl:v:3:y:2008:i:1:p:19-22 is not listed on IDEAS
    6. Michael Kremer, 1993. "The O-Ring Theory of Economic Development," The Quarterly Journal of Economics, Oxford University Press, vol. 108(3), pages 551-575.
    7. Feenstra, Robert C & Hanson, Gordon H, 1996. "Globalization, Outsourcing, and Wage Inequality," American Economic Review, American Economic Association, vol. 86(2), pages 240-245, May.
    8. Coralio Ballester & Antoni Calvó-Armengol & Yves Zenou, 2006. "Who's Who in Networks. Wanted: The Key Player," Econometrica, Econometric Society, vol. 74(5), pages 1403-1417, September.
    9. Martin Beraja & Erik Hurst & Juan Ospina, 2016. "The Aggregate Implications of Regional Business Cycles," NBER Working Papers 21956, National Bureau of Economic Research, Inc.
    10. Gene M. Grossman & Elhanan Helpman & Ezra Oberfield & Thomas Sampson, 2017. "Balanced Growth Despite Uzawa," American Economic Review, American Economic Association, vol. 107(4), pages 1293-1312, April.
    11. Michael D. König & Dominic Rohner & Mathias Thoenig & Fabrizio Zilibotti, 2017. "Networks in Conflict: Theory and Evidence From the Great War of Africa," Econometrica, Econometric Society, vol. 85, pages 1093-1132, July.
    12. Basile Grassi, 2017. "IO in I-O: Competition and Volatility in Input-Output Networks," 2017 Meeting Papers 1637, Society for Economic Dynamics.
    13. Vasco Carvalho & Xavier Gabaix, 2013. "The Great Diversification and Its Undoing," American Economic Review, American Economic Association, vol. 103(5), pages 1697-1727, August.
    14. Matthew Elliott & Benjamin Golub & Matthew O. Jackson, 2014. "Financial Networks and Contagion," American Economic Review, American Economic Association, vol. 104(10), pages 3115-3153, October.
    15. Ezra Oberfield & Devesh Raval, 2012. "Micro data and macro technology," Working Paper Series WP-2012-11, Federal Reserve Bank of Chicago.
    16. Julian di Giovanni & Andrei A. Levchenko & Isabelle Mejean, 2014. "Firms, Destinations, and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 82(4), pages 1303-1340, July.
    17. Jean-Noël Barrot & Julien Sauvagnat, 2016. "Input Specificity and the Propagation of Idiosyncratic Shocks in Production Networks," The Quarterly Journal of Economics, Oxford University Press, vol. 131(3), pages 1543-1592.
    18. Hunt Allcott & Allan Collard-Wexler & Stephen D. O'Connell, 2016. "How Do Electricity Shortages Affect Industry? Evidence from India," American Economic Review, American Economic Association, vol. 106(3), pages 587-624, March.
    19. Blackorby, Charles & Russell, R Robert, 1989. "Will the Real Elasticity of Substitution Please Stand Up? (A Comparison of the Allen/Uzawa and Morishima Elasticities)," American Economic Review, American Economic Association, vol. 79(4), pages 882-888, September.
    20. Saki Bigio, 2013. "Financial Frictions in Production Networks," 2013 Meeting Papers 121, Society for Economic Dynamics.
    21. Comin, Diego & Lashkari, Danial & Mestieri, Martí, 2015. "Structural Change with Long-run Income and Price Effects," CEPR Discussion Papers 10846, C.E.P.R. Discussion Papers.
    22. repec:hrv:faseco:34651705 is not listed on IDEAS
    23. Xavier Gabaix, 2011. "The Granular Origins of Aggregate Fluctuations," Econometrica, Econometric Society, vol. 79(3), pages 733-772, May.
    24. Hamilton, James D., 2003. "What is an oil shock?," Journal of Econometrics, Elsevier, vol. 113(2), pages 363-398, April.
    25. Kurz, Christopher & Senses, Mine Z., 2016. "Importing, exporting, and firm-level employment volatility," Journal of International Economics, Elsevier, vol. 98(C), pages 160-175.
    26. Daron Acemoglu & David Autor & David Dorn & Gordon H. Hanson & Brendan Price, 2016. "Import Competition and the Great US Employment Sag of the 2000s," Journal of Labor Economics, University of Chicago Press, vol. 34(S1), pages 141-198.
    27. David Baqaee, 2016. "Cascading Failures in Production Networks," 2016 Meeting Papers 402, Society for Economic Dynamics.
    28. Ariel Burstein & Javier Cravino, 2015. "Measured Aggregate Gains from International Trade," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(2), pages 181-218, April.
    29. Robert J. Barro, 2006. "Rare Disasters and Asset Markets in the Twentieth Century," The Quarterly Journal of Economics, Oxford University Press, vol. 121(3), pages 823-866.
    30. Boyan Jovanovic, 1987. "Micro Shocks and Aggregate Risk," The Quarterly Journal of Economics, Oxford University Press, vol. 102(2), pages 395-409.
    31. Steven N. Durlauf, 1993. "Nonergodic Economic Growth," Review of Economic Studies, Oxford University Press, vol. 60(2), pages 349-366.
    32. Daron Acemoglu & Asuman Ozdaglar & Alireza Tahbaz-Salehi, 2015. "Systemic Risk and Stability in Financial Networks," American Economic Review, American Economic Association, vol. 105(2), pages 564-608, February.
    33. Boehm, Christoph E. & Flaaen, Aaron & Pandalai-Nayar, Nitya, 2015. "Input Linkages and the Transmission of Shocks: Firm-Level Evidence from the 2011 Tohōku Earthquake," Finance and Economics Discussion Series 2015-94, Board of Governors of the Federal Reserve System (U.S.).
    34. Dupor, Bill, 1999. "Aggregation and irrelevance in multi-sector models," Journal of Monetary Economics, Elsevier, vol. 43(2), pages 391-409, April.
    35. Stella, Andrea, 2015. "Firm dynamics and the origins of aggregate fluctuations," Journal of Economic Dynamics and Control, Elsevier, vol. 55(C), pages 71-88.
    36. Milgrom, Paul & Roberts, John, 1996. "The LeChatelier Principle," American Economic Review, American Economic Association, vol. 86(1), pages 173-179, March.
    37. Costinot, Arnaud & Rodríguez-Clare, Andrés, 2014. "Trade Theory with Numbers: Quantifying the Consequences of Globalization," Handbook of International Economics, Elsevier.
    38. Charles I. Jones, 2011. "Intermediate Goods and Weak Links in the Theory of Economic Development," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(2), pages 1-28, April.
    39. Gomme, Paul & Rupert, Peter, 2007. "Theory, measurement and calibration of macroeconomic models," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 460-497, March.
    40. 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.
    41. Daron Acemoglu & Vasco M. Carvalho & Asuman Ozdaglar & Alireza Tahbaz‐Salehi, 2012. "The Network Origins of Aggregate Fluctuations," Econometrica, Econometric Society, vol. 80(5), pages 1977-2016, September.
    42. H. S. Houthakker, 1955. "The Pareto Distribution and the Cobb-Douglas Production Function in Activity Analysis," Review of Economic Studies, Oxford University Press, vol. 23(1), pages 27-31.
    43. Matthew J. Notowidigdo, 2011. "The Incidence of Local Labor Demand Shocks," 2011 Meeting Papers 629, Society for Economic Dynamics.
    44. Lucas, Robert E., 1977. "Understanding business cycles," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 5(1), pages 7-29, January.
    45. Charles R. Hulten, 1978. "Growth Accounting with Intermediate Inputs," Review of Economic Studies, Oxford University Press, vol. 45(3), pages 511-518.
    46. Xavier Gabaix, 2016. "Power Laws in Economics: An Introduction," Journal of Economic Perspectives, American Economic Association, vol. 30(1), pages 185-206, Winter.
    47. repec:pri:cepsud:235shin is not listed on IDEAS
    48. Saki Bigio & Jennifer La’O, 2016. "Financial Frictions in Production Networks," Working Papers 2016-67, Peruvian Economic Association.
    49. Marti Mestieri & Danial Lashkari & Diego Comin, 2015. "Structural Transformations with Long-Run Price and Income Effects," 2015 Meeting Papers 437, Society for Economic Dynamics.
    50. Scheinkman, Jose A & Woodford, Michael, 1994. "Self-Organized Criticality and Economic Fluctuations," American Economic Review, American Economic Association, vol. 84(2), pages 417-421, May.
    51. Diewert, W. E., 1976. "Exact and superlative index numbers," Journal of Econometrics, Elsevier, vol. 4(2), pages 115-145, May.
    52. Charles R. Hulten, 2001. "Total Factor Productivity: A Short Biography," NBER Chapters,in: New Developments in Productivity Analysis, pages 1-54 National Bureau of Economic Research, Inc.
    53. Dominick Bartelme & Yuriy Gorodnichenko, 2015. "Linkages and Economic Development," NBER Working Papers 21251, National Bureau of Economic Research, Inc.
    54. Se-Jik Kim & Hyun Song Shin, 2013. "Working Capital, Trade and Macro Fluctuations," Working Papers 1465, Princeton University, Department of Economics, Center for Economic Policy Studies..
    55. Horvath, Michael, 2000. "Sectoral shocks and aggregate fluctuations," Journal of Monetary Economics, Elsevier, vol. 45(1), pages 69-106, February.
    56. Enghin Atalay, 2017. "How Important Are Sectoral Shocks?," American Economic Journal: Macroeconomics, American Economic Association, vol. 9(4), pages 254-280, October.
    57. Matthew O. Jackson & Brian W. Rogers, 2007. "Meeting Strangers and Friends of Friends: How Random Are Social Networks?," American Economic Review, American Economic Association, vol. 97(3), pages 890-915, June.
    58. Michael Horvath, 1998. "Cyclicality and Sectoral Linkages: Aggregate Fluctuations from Independent Sectoral Shocks," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(4), pages 781-808, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Joseph Steinberg, 2018. "International Portfolio Diversification and the Structure of Global Production," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 29, pages 195-219, July.
    2. Michael Weber & Ali Ozdagli, 2016. "Monetary Policy Through Production Networks: Evidence from the Stock Market," 2016 Meeting Papers 148, Society for Economic Dynamics.
    3. Galeotti, A. & Golub, B. & Goyal, S., 2017. "Targeting Interventions in Networks," Cambridge Working Papers in Economics 1744, Faculty of Economics, University of Cambridge.
    4. Ernesto Pasten & Raphael S. Schoenle & Michael Weber, 2017. "Price Rigidities and the Granular Origins of Aggregate Fluctuations," CESifo Working Paper Series 6619, CESifo Group Munich.
    5. Jan De Loecker & Jan Eeckhout, 2017. "The Rise of Market Power and the Macroeconomic Implications," NBER Working Papers 23687, National Bureau of Economic Research, Inc.
    6. David Baqaee & Emmanuel Farhi, 2018. "Productivity and Misallocation in General Equilibrium," 2018 Meeting Papers 357, Society for Economic Dynamics.
    7. David Rezza Baqaee & Emmanuel Farhi, 2017. "Productivity and Misallocation in General Equilibrium," NBER Working Papers 24007, National Bureau of Economic Research, Inc.
    8. Lorenzo Caliendo & Fernando Parro & Aleh Tsyvinski, 2017. "Distortions and the Structure of the World Economy," NBER Working Papers 23332, National Bureau of Economic Research, Inc.
    9. Daron Acemoglu & Pablo D. Azar, 2017. "Endogenous Production Networks," NBER Working Papers 24116, National Bureau of Economic Research, Inc.
    10. repec:fip:fedker:00052 is not listed on IDEAS
    11. repec:eee:ecolet:v:165:y:2018:i:c:p:65-69 is not listed on IDEAS
    12. Ernesto Pasten & Raphael Schoenle & Michael Weber, 2017. "Price Rigidity and the Origins of Aggregate Fluctuations," NBER Working Papers 23750, National Bureau of Economic Research, Inc.
    13. Atalay, Enghin & Drautzburg, Thorsten & Wang, Zhenting, 2018. "Accounting for the sources of macroeconomic tail risks," Economics Letters, Elsevier, vol. 165(C), pages 65-69.

    More about this item

    JEL classification:

    • J1 - Labor and Demographic Economics - - Demographic Economics

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:11845. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.