Microeconomic Origins of Macroeconomic Tail Risks
We document that even though the normal distribution provides a good approximation to GDP fluctuations, it severely underpredicts “macroeconomic tail risks,” that is, the frequency of large economic downturns. Using a multi-sector 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. Notably, we also show that such departures can happen while GDP is approximately normally distributed away from the tails, highlighting the qualitatively different behavior of large economic downturns from small or moderate fluctuations. We further demonstrate the special role that input-output linkages play in generating “tail comovements,” whereby large recessions involve not only significant GDP contractions, but also large simultaneous declines across a wide range of sectors.
Published Versions
Daron Acemoglu & Asuman Ozdaglar & Alireza Tahbaz-Salehi, 2017. "Microeconomic Origins of Macroeconomic Tail Risks," American Economic Review, American Economic Association, vol. 107(1), pages 54-108, January. citation courtesy of 
Related
More from NBER
In addition to working papers, the NBER disseminates affiliates’ latest findings through a range of free periodicals — the NBER Reporter, the NBER Digest, the Bulletin on Retirement and Disability, the Bulletin on Health, and the Bulletin on Entrepreneurship — as well as online conference reports, video lectures, and interviews.
