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Microeconomic Origins of Macroeconomic Tail Risks

Author

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  • Daron Acemoglu
  • Asuman Ozdaglar
  • Alireza Tahbaz-Salehi

Abstract

We document that even though the normal distribution provides a good approximation to GDP fluctuations, it severely underpredicts “macroeconomic tail risks,” that is, the frequency of large economic downturns. Using a multi-sector general equilibrium model, we show that the interplay of idiosyncratic microeconomic shocks and sectoral heterogeneity results in systematic departures in the likelihood of large economic downturns relative to what is implied by the normal distribution. Notably, we also show that such departures can happen while GDP is approximately normally distributed away from the tails, highlighting the qualitatively different behavior of large economic downturns from small or moderate fluctuations. We further demonstrate the special role that input-output linkages play in generating “tail comovements,” whereby large recessions involve not only significant GDP contractions, but also large simultaneous declines across a wide range of sectors.

Suggested Citation

  • Daron Acemoglu & Asuman Ozdaglar & Alireza Tahbaz-Salehi, 2015. "Microeconomic Origins of Macroeconomic Tail Risks," NBER Working Papers 20865, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:20865
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Michael Weber & Ali Ozdagli, 2016. "Monetary Policy Through Production Networks: Evidence from the Stock Market," 2016 Meeting Papers 148, Society for Economic Dynamics.
    2. David Baqaee & Emmanuel Farhi, 2017. "The Macroeconomic Impact of Microeconomic Shocks: Beyond Hulten's Theorem," Working Paper 482151, Harvard University OpenScholar.
    3. 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.
    4. Bee, Marco & Riccaboni, Massimo & Trapin, Luca, 2017. "An extreme value analysis of the last century crises across industries in the U.S. economy," Journal of Economic Dynamics and Control, Elsevier, vol. 81(C), pages 65-78.
    5. Branger, Nicole & Konermann, Patrick & Meinerding, Christoph & Schlag, Christian, 2018. "Equilibrium asset pricing in directed networks," Discussion Papers 37/2018, Deutsche Bundesbank.
    6. Fischer, Jack R. & McPhail, Joseph E. & Rodrigues, Nathan & Orazem, Peter, 2017. "The Relative Importance of Macroeconomic Shocks, Regional Shocks and Idiosyncratic Risk on Large and Small Banks," ISU General Staff Papers 201707130700001027, Iowa State University, Department of Economics.
    7. Anja Kukuvec & Harald Oberhofer, 2018. "The Propagation of Business Sentiment within the European Union?," WIFO Working Papers 549, WIFO.
    8. Everett Grant, 2018. "The Double-Edged Sword of Global Integration: Robustness, Fragility \& Contagion in the International Firm Network," 2018 Meeting Papers 506, Society for Economic Dynamics.
    9. Wood, Aaron D., 2017. "A model to teach non-rival and excludable goods in undergraduate microeconomics," International Review of Economics Education, Elsevier, vol. 24(C), pages 28-35.
    10. Daron Acemoglu & Pablo D. Azar, 2017. "Endogenous Production Networks," NBER Working Papers 24116, National Bureau of Economic Research, Inc.
    11. repec:mnb:finrev:v:16:y:2017:i:2:p:40-63 is not listed on IDEAS
    12. repec:wiw:wiwwuw:wuwp257 is not listed on IDEAS
    13. repec:eee:ecolet:v:165:y:2018:i:c:p:65-69 is not listed on IDEAS
    14. Grant, Everett & Yung, Julieta, 2017. "The Double-Edged Sword of Global Integration: Robustness, Fragility & Contagion in the International Firm Network," Globalization and Monetary Policy Institute Working Paper 313, Federal Reserve Bank of Dallas.
    15. Aida Caldera Sánchez & Oliver Röhn, 2016. "How do policies influence GDP tail risks?," OECD Economics Department Working Papers 1339, OECD Publishing.
    16. Dong, Feng & Wen, Yi, 2018. "Long and Plosser Meet Bewley and Lucas," Working Papers 2018-8, Federal Reserve Bank of St. Louis.
    17. 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.
    18. Leal-Ordoñez Julio C., 2015. "Key sectors in economic development: a perspective from input-output linkages and cross-sector misallocation," Working Papers 2015-23, Banco de México.
    19. repec:wiw:wus005:6003 is not listed on IDEAS
    20. 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:

    • C67 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Input-Output Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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