Microeconomic Origins of Macroeconomic Tail Risks
Daron Acemoglu, Asuman Ozdaglar, Alireza Tahbaz-Salehi
Summary
The paper studies how the structure of production networks shapes the distribution of aggregate output, with particular attention to large downturns. It shows that even when idiosyncratic shocks are thin-tailed, interconnections can generate fat-tailed, asymmetric aggregate fluctuations in which large recessions are far more likely than large booms. Network features such as dominant suppliers and limited input substitutability amplify the probability of deep contractions.
Key findings
- Sparse or asymmetric input-output linkages can transform thin-tailed micro shocks into heavy-tailed aggregate output.
- The economy can exhibit larger and more frequent deep recessions than expansions due to network structure.
- Tail risk is driven by the network's interconnections rather than by the tail behavior of the underlying shocks.
Subjects & keywords
Cite this paper
Daron Acemoglu, Asuman Ozdaglar, & Alireza Tahbaz-Salehi (2017). Microeconomic Origins of Macroeconomic Tail Risks. American Economic Review. https://doi.org/10.1257/aer.20151086
@article{acemoglu2017microeconomic,
author = {Daron Acemoglu and Asuman Ozdaglar and Alireza Tahbaz-Salehi},
title = {Microeconomic Origins of Macroeconomic Tail Risks},
journal = {American Economic Review},
year = {2017},
doi = {10.1257/aer.20151086},
url = {https://doi.org/10.1257/aer.20151086}
}