The Network Origins of Aggregate Fluctuations
38 Pages Posted: 21 Oct 2011 Last revised: 2 Oct 2012
There are 2 versions of this paper
The Network Origins of Aggregate Fluctuations
Date Written: March 2012
Abstract
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 sup- pliers 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.
Keywords: Business cycle, aggregate volatility, diversification, input-output linkages, intersectoral network, cascades
JEL Classification: C67, D57, E32
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Cyclicality and Sectoral Linkages: Aggregate Fluctuations from Independent Sectoral Shocks
-
Building Blocks of Market Clearing Business Cycle Models
By Kevin M. Murphy, Andrei Shleifer, ...
-
Complementarities and Comovements
By John Shea
