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The Macroeconomic Impact of Microeconomic Shocks: Beyond Hulten’s Theorem

David Baqaee and Emmanuel Farhi ()

No 1734, Discussion Papers from Centre for Macroeconomics (CFM)

Abstract: 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 structural parameters are mapped to these reduced-form elasticities. In this sense, we extend the foundational theorem of Hulten (1978) beyond first-order terms. Key features ignored by first-order approximations that play a crucial role are: structural elasticities of substitution, network linkages, structural returns to scale, and the extent of factor reallocation. Higher-order terms magnify negative shocks and attenuate positive shocks, resulting in an output distribution that is asymmetric, fat-tailed, and has a lower mean even when shocks are symmetric and thin-tailed. In our calibration, output losses due to business-cycle fluctuations are an order of magnitude larger than the cost calculated by Lucas (1987). Second-order terms also show how shocks to critical sectors can have large macroeconomic impacts, tripling the estimated impact of the 1970s oil price shocks.

New Economics Papers: this item is included in nep-mac
Date: 2017-06
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Related works:
Working Paper: The Macroeconomic Impact of Microeconomic Shocks: Beyond Hulten's Theorem (2017) Downloads
Working Paper: The macroeconomic impact of microeconomic shocks: beyond Hulten's Theorem (2017) Downloads
Working Paper: The Macroeconomic Impact of Microeconomic Shocks: Beyond Hulten's Theorem (2017) Downloads
Working Paper: The Macroeconomic Impact of Microeconomic Shocks: Beyond Hulten's Theorem (2017) Downloads
Working Paper: The Macroeconomic Impact of Microeconomic Shocks: Beyond Hulten's Theorem (2017) Downloads
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