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The Network Origins of Aggregate Fluctuations

36 Pages Posted: 22 Oct 2011  

Daron Acemoglu

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

Vasco M. Carvalho

Universitat Pompeu Fabra/CREI; Centre for Economic Policy Research (CEPR); University of Cambridge

Asuman E. Ozdaglar

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

Alireza Tahbaz-Salehi

Northwestern University - Kellogg School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: October 20, 2011

Abstract

This paper argues that in the presence of intersectoral input-output linkages, microeconomic idiosyncratic shocks may lead to aggregate fluctuations. In particular, it shows 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 indirectly 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

Acemoglu, Daron and Carvalho, Vasco M. and Ozdaglar, Asuman E. and Tahbaz-Salehi, Alireza, The Network Origins of Aggregate Fluctuations (October 20, 2011). MIT Department of Economics Working Paper No. 11-23. Available at SSRN: https://ssrn.com/abstract=1947096 or http://dx.doi.org/10.2139/ssrn.1947096

Daron Acemoglu (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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Vasco M. Carvalho

Universitat Pompeu Fabra/CREI ( email )

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Spain

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Centre for Economic Policy Research (CEPR) ( email )

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University of Cambridge ( email )

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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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Evanston, IL 60208
United States

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