Working Paper: NBER ID: w23145
Authors: David Rezza Baqaee; Emmanuel Farhi
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 microeconomic parameters are mapped to these reduced-form general equilibrium elasticities. In this sense, we extend the foundational theorem of Hulten (1978) beyond the first order to capture nonlinearities. Key features ignored by first-order approximations that play a crucial role are: structural microeconomic elasticities of substitution, network linkages, structural microeconomic returns to scale, and the extent of factor reallocation. In a business-cycle calibration with sectoral shocks, nonlinearities magnify negative shocks and attenuate positive shocks, resulting in an aggregate output distribution that is asymmetric (negative skewness), fat-tailed (excess kurtosis), and a has negative mean, even when shocks are symmetric and thin-tailed. Average output losses due to short-run sectoral shocks are an order of magnitude larger than the welfare cost of business cycles calculated by Lucas (1987). Nonlinearities can also cause shocks to critical sectors to have disproportionate macroeconomic effects, almost tripling the estimated impact of the 1970s oil shocks on world aggregate output. Finally, in a long-run growth context, nonlinearities, which underpin Baumol’s cost disease via the increase over time in the sales shares of low-growth bottleneck sectors, account for a 20 percentage point reduction in aggregate TFP growth over the period 1948-2014 in the US.
Keywords: Macroeconomics; Microeconomic Shocks; Productivity; Nonlinearities; Hulten's Theorem
JEL Codes: E01; E1; E23; E32; L16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| nonlinearities in the impact of microeconomic shocks (D89) | magnify negative shocks (E71) |
| nonlinearities in the impact of microeconomic shocks (D89) | attenuate positive shocks (C22) |
| nonlinearities in the impact of microeconomic shocks (D89) | asymmetric output distribution (D39) |
| average output losses due to short-run sectoral shocks (E23) | larger than welfare costs of business cycles (D69) |
| shocks to critical sectors (E44) | disproportionately large macroeconomic effects (F41) |
| nonlinearities (C32) | tripled the estimated impact of the 1970s oil shocks on world aggregate output (Q43) |
| nonlinearities (C32) | 20 percentage point reduction in aggregate total factor productivity (TFP) growth in the US from 1948 to 2014 (O49) |