The Network Origins of Large Economic Downturns

23 Pages Posted: 16 Jul 2013

See all articles by Daron Acemoglu

Daron Acemoglu

Massachusetts Institute of Technology (MIT) - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Asuman E. Ozdaglar

Massachusetts Institute of Technology (MIT) - Department of Electrical Engineering and Computer Science

Alireza Tahbaz-Salehi

Northwestern University - Kellogg School of Management; Centre for Economic Policy Research (CEPR)

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Date Written: June 30, 2013

Abstract

This paper shows that large economic downturns may result from the propagation of micro-economic 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 inter-sectoral 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: input-output networks, aggregate output, business cycles, economic downturns

JEL Classification: C67, E32

Suggested Citation

Acemoglu, Daron and Ozdaglar, Asuman E. and Tahbaz-Salehi, Alireza, The Network Origins of Large Economic Downturns (June 30, 2013). MIT Department of Economics Working Paper No. 13-16, Available at SSRN: https://ssrn.com/abstract=2294153 or http://dx.doi.org/10.2139/ssrn.2294153

Daron Acemoglu (Contact Author)

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Asuman E. Ozdaglar

Massachusetts Institute of Technology (MIT) - Department of Electrical Engineering and Computer Science ( email )

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Alireza Tahbaz-Salehi

Northwestern University - Kellogg School of Management ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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