A Cautionary Tale of Fat Tails

Several macroeconomic time series exhibit excess kurtosis or “Fat Tails” possibly due to rare but large shocks (i.e., tail events). We document the extent to which tail events are attributable to long-run growth shocks. We show that excess kurtosis is not a uniform characteristic of postwar US data, but attributable to episodes containing well-documented growth shocks. A general equilibrium model captures these observations assuming Gaussian business-cycle shocks and a single growth shock from various sources. The model matches the data best with a growth shock to labor productivity while investment-specific technology shocks drive cycles.