Cautionary tales of fat tails

Chetan Dave, Scott J. Dressler and Samreen Malik

Journal of Macroeconomics, 2025, vol. 84, issue C

Abstract: Distributions of GDP fluctuations that exhibit fat tails shed doubt on the suitability of Normal distributions in empirical and theoretical business-cycle analyses. We document: (i) fat tails in US output fluctuations are not a pervading characteristic of the entire post-war sample, and appear in subsamples exhibiting declines in cyclical and trend volatility (e.g., the Great Moderation); (ii) a DSGE environment featuring Normal shocks that match the declines in observed cyclical and trend volatility can explain almost all of the fat-tailed characteristics observed in the data, leaving little support for the role of rare, large shocks delivering fat-tailed distributions.

Keywords: Fat tails; Growth shocks; Real business cycles (search for similar items in EconPapers)
JEL-codes: E0 E3 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:84:y:2025:i:c:s0164070425000163

DOI: 10.1016/j.jmacro.2025.103679

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