Working Paper: NBER ID: w19230
Authors: Daron Acemoglu; Asuman Ozdaglar; Alireza Tahbazsalehi
Abstract: This paper shows that large economic downturns may result from the propagation of microeconomic shocks over the input-output linkages across different firms or sectors within the economy. Building on the framework of Acemoglu et al. (2012), we argue that the economy's input-output structure can fundamentally reshape the distribution of aggregate output, increasing the likelihood of large downturns from infinitesimal to substantial. More specifically, we show that an economy with non-trivial intersectoral input-output linkages that is subject to thin-tailed productivity shocks may exhibit deep recessions as frequently as economies that are subject to heavy-tailed shocks. Moreover, we show that in the presence of input-output linkages, aggregate volatility is not necessarily a sufficient statistic for the likelihood of large downturns. Rather, depending on the shape of the distribution of the idiosyncratic shocks, different features of the economy's input-output network may be of first-order importance. Finally, our results establish that the effects of the economy's input-output structure and the nature of the idiosyncratic firm-level shocks on aggregate output are not separable, in the sense that the likelihood of large economic downturns is determined by the interplay between the two.
Keywords: Economic downturns; Input-output linkages; Microeconomic shocks
JEL Codes: C67; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| microeconomic shocks (E39) | large economic downturns (F44) |
| input-output structure (C67) | distribution of aggregate output (E16) |
| intersectoral linkages (O19) | deep recessions (E32) |
| distribution of shocks + input-output structure (C67) | likelihood of large downturns (E32) |
| aggregate volatility (E10) | likelihood of large downturns (normal shocks) (E32) |
| centrality of dominant supplier (L14) | likelihood of large downturns (exponential shocks) (E32) |