Microeconomic origins of macroeconomic tail risks

Daron Acemoglu, Asuman Ozdaglar, Alireza Tahbaz-Salehi

Research output: Contribution to journalArticlepeer-review

44 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)54-108
Number of pages55
JournalAmerican Economic Review
Volume107
Issue number1
DOIs
StatePublished - Jan 2017

ASJC Scopus subject areas

  • Economics and Econometrics

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