Microeconomic Origins of Macroeconomic Tail Risks

Daron Acemoglu, Asuman Ozdaglar and Alireza Tahbaz-Salehi

No 20865, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: C67 E32 (search for similar items in EconPapers)
Date: 2015-01
New Economics Papers: this item is included in nep-ias and nep-mac
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Published as Daron Acemoglu & Asuman Ozdaglar & Alireza Tahbaz-Salehi, 2017. "Microeconomic Origins of Macroeconomic Tail Risks," American Economic Review, American Economic Association, vol. 107(1), pages 54-108, January.

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Journal Article: Microeconomic Origins of Macroeconomic Tail Risks (2017)
Working Paper: Microeconomic Origins of Macroeconomic Tail Risks (2015)
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