The Macroeconomic Impact of Microeconomic Shocks: Beyond Hulten's Theorem / David Rezza Baqaee, Emmanuel Farhi.

Format:

Book

Author/Creator:

Baqaee, David Rezza.

Contributor:

National Bureau of Economic Research.

Farhi, Emmanuel.

Series:

Working Paper Series (National Bureau of Economic Research) no. w23145.

NBER working paper series no. w23145

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Macroeconomic Impact of Microeconomic Shocks

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2017.

Summary:

We provide a nonlinear characterization of the macroeconomic impact of microeconomic productivity shocks in terms of reduced-form non-parametric elasticities for efficient economies. We also show how microeconomic parameters are mapped to these reduced-form general equilibrium elasticities. In this sense, we extend the foundational theorem of Hulten (1978) beyond the first order to capture nonlinearities. Key features ignored by first-order approximations that play a crucial role are: structural microeconomic elasticities of substitution, network linkages, structural microeconomic returns to scale, and the extent of factor reallocation. In a business-cycle calibration with sectoral shocks, nonlinearities magnify negative shocks and attenuate positive shocks, resulting in an aggregate output distribution that is asymmetric (negative skewness), fat-tailed (excess kurtosis), and a has negative mean, even when shocks are symmetric and thin-tailed. Average output losses due to short-run sectoral shocks are an order of magnitude larger than the welfare cost of business cycles calculated by Lucas (1987). Nonlinearities can also cause shocks to critical sectors to have disproportionate macroeconomic effects, almost tripling the estimated impact of the 1970s oil shocks on world aggregate output. Finally, in a long-run growth context, nonlinearities, which underpin Baumol's cost disease via the increase over time in the sales shares of low-growth bottleneck sectors, account for a 20 percentage point reduction in aggregate TFP growth over the period 1948-2014 in the US.

Notes:

Print version record

February 2017.