The Macroeconomic Impact of Microeconomic Shocks: Beyond Hulten's Theorem

72 Pages Posted: 13 Feb 2017 Last revised: 27 Feb 2017

See all articles by David Baqaee

David Baqaee

London School of Economics and Political Science, Department of International Development, Students

Emmanuel Farhi

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: February 2017

Abstract

We provide a nonlinear characterization of the macroeconomic impact of microeconomic productivity shocks in terms of reduced-form non-parametric elasticities for efficient economies. We also show how microeconomic parameters are mapped to these reduced-form general equilibrium elasticities. In this sense, we extend the foundational theorem of Hulten (1978) beyond the first order to capture nonlinearities. Key features ignored by first-order approximations that play a crucial role are: structural microeconomic elasticities of substitution, network linkages, structural microeconomic returns to scale, and the extent of factor reallocation. In a business-cycle calibration with sectoral shocks, nonlinearities magnify negative shocks and attenuate positive shocks, resulting in an aggregate output distribution that is asymmetric (negative skewness), fat-tailed (excess kurtosis), and a has negative mean, even when shocks are symmetric and thin-tailed. Average output losses due to short-run sectoral shocks are an order of magnitude larger than the welfare cost of business cycles calculated by Lucas (1987). Nonlinearities can also cause shocks to critical sectors to have disproportionate macroeconomic effects, almost tripling the estimated impact of the 1970s oil shocks on world aggregate output. Finally, in a long-run growth context, nonlinearities, which underpin Baumol’s cost disease via the increase over time in the sales shares of low-growth bottleneck sectors, account for a 20 percentage point reduction in aggregate TFP growth over the period 1948-2014 in the US.

Suggested Citation

Baqaee, David and Farhi, Emmanuel, The Macroeconomic Impact of Microeconomic Shocks: Beyond Hulten's Theorem (February 2017). NBER Working Paper No. w23145. Available at SSRN: https://ssrn.com/abstract=2915972

David Baqaee (Contact Author)

London School of Economics and Political Science, Department of International Development, Students ( email )

London
United Kingdom

HOME PAGE: http://sites.google.com/site/davidbaqaee/

Emmanuel Farhi

Harvard University - Department of Economics ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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