Microeconomic Origins of Macroeconomic Tail Risks / Daron Acemoglu, Asuman Ozdaglar, Alireza Tahbaz-Salehi.

Format:

Book

Author/Creator:

Acemoglu, Daron.

Contributor:

National Bureau of Economic Research.

Ozdaglar, Asuman.

Tahbaz-Salehi, Alireza.

Series:

Working Paper Series (National Bureau of Economic Research) no. w20865.

NBER working paper series no. w20865

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2015.

Summary:

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.

Notes:

Print version record

January 2015.