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American Economic Review Vol. 107 No. 1 2017

Microeconomic Origins of Macroeconomic Tail Risks

Daron Acemoglu1; Asuman Ozdaglar2; Alireza Tahbaz-Salehi3

1 Department of Economics, Massachusetts Institute of Technology, 77 Massachusetts Avenue, E52-446, Cambridge, MA 02142 (e-mail: ) · 2 Laboratory for Information and Decision Systems, Massachusetts Institute of Technology, 77 Massachusetts Avenue, 32-D608, Cambridge, MA 02139 (e-mail: ) · 3 Columbia Business School, Columbia University, 3022 Broadway, Uris Hall 418, New York, NY 10027 (e-mail: )

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Abstract

Using a multisector 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. Such departures can emerge even though GDP fluctuations are approximately normally distributed away from the tails, highlighting the different nature of large economic downturns from regular business-cycle fluctuations. We further demonstrate the special role of input-output linkages in generating tail comovements, whereby large recessions involve not only significant GDP contractions, but also large simultaneous declines across a wide range of industries.

DOI
10.1257/aer.20151086
Volume
107
Issue
1
Pages
54-108
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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