The Network Origins of Aggregate Fluctuations

Recognition Program

Authors: Daron Acemoglu, Vasco M. Carvalho, Asuman Ozdaglar and Alireza Tahbaz-Salehi

Econometrica, Vol. 80, No 5, 1977--2016, January, 2012

This paper argues that, in the presence of intersectoral input-output linkages, microeconomic idiosyncratic shocks may lead to aggregate fluctuations. We show that, as the economy becomes more disaggregated, the rate at which aggregate volatility decays is determined by the structure of the network capturing such linkages. Our main results provide a characterization of this relationship in terms of the importance of different sectors as suppliers to their immediate customers, as well as their role as indirect suppliers to chains of downstream sectors. Such higher-order interconnections capture the possibility of "cascade effects" whereby productivity shocks to a sector propagate not only to its immediate downstream customers, but also to the rest of the economy. Our results highlight that sizable aggregate volatility is obtained from sectoral idiosyncratic shocks only if there exists significant asymmetry in the roles that sectors play as suppliers to others, and that the "sparseness" of the input-output matrix is unrelated to the nature of aggregate fluctuations. © 2012 The Econometric Society.

This paper originally appeared as Barcelona GSE Working Paper 587
This paper is acknowledged by the Barcelona GSE Research Recognition Program