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Microeconomic Origins of Macroeconomic Tail Risks

Daron Acemoglu, Asuman Ozdaglar and Alireza Tahbaz-Salehi

American Economic Review, 2017, vol. 107, issue 1, 54-108

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.

JEL-codes: D57 E16 E23 E32 (search for similar items in EconPapers)
Date: 2017
Note: DOI: 10.1257/aer.20151086
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Working Paper: Microeconomic Origins of Macroeconomic Tail Risks (2015) Downloads
Working Paper: Microeconomic Origins of Macroeconomic Tail Risks (2015) Downloads
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