Posted Content•
The Granular Origins of Aggregate Fluctuations
TL;DR: This article showed that idiosyncratic firm-level fluctuations can explain an important part of aggregate shocks, and provide a micro-foundation for aggregate productivity shocks, arguing that individual firm shocks average out in aggregate.
Abstract: This paper proposes that idiosyncratic firm-level fluctuations can explain an important part of aggregate shocks, and provide a microfoundation for aggregate productivity shocks. Existing research has focused on using aggregate shocks to explain business cycles, arguing that individual firm shocks average out in aggregate. I show that this argument breaks down if the distribution of firm sizes is fat-tailed, as documented empirically. The idiosyncratic movements of the largest 100 firms in the US appear to explain about one third of variations in output and the Solow residual. This "granular" hypothesis suggests new directions for macroeconomic research, in particular that macroeconomic questions can be clarified by looking at the behavior of large firms. This paper's ideas and analytical results may also be useful to think about the fluctuations of other economic aggregates, such as exports or the trade balance.
Citations
More filters
TL;DR: In this paper, the authors argue that in the presence of intersectoral input-output linkages, microeconomic idiosyncratic shocks may lead to aggregate fluctuations and that the rate at which aggregate volatility decays is determined by the structure of the network capturing such linkages.
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.
1,174 citations
Cites background or result from "The Granular Origins of Aggregate F..."
...Our paper is most closely related to Gabaix (2011), who shows that firm-level idiosyncratic shocks translate into aggregate fluctuations when the firm size distribution is sufficiently heavytailed and the largest firms contribute disproportionally to aggregate output....
[...]
...Even though such central sectors are also larger in equilibrium, there exist important distinctions between our work and Gabaix (2011)....
[...]
...This is not surprising in view of the results in Hulten (1978) and Gabaix (2011), relating aggregate total factor productivity (TFP) to firm- or sector-level TFPs weighted by sales.10 This observation also implies that there exists a close connection between our results on the network origins of…...
[...]
...Furthermore, unlike in Gabaix (2011), the structure of interconnections also determines the comovements between 8In general, sectoral shocks also affect upstream production through a price and a quantity effect....
[...]
TL;DR: In this paper, a review of empirical power laws regarding income and wealth, the size of cities and firms, stock market returns, trading volume, international trade, and executive pay is presented.
Abstract: A power law (PL) is the form taken by a large number of surprising empirical regularities in economics and finance. This review surveys well-documented empirical PLs regarding income and wealth, the size of cities and firms, stock market returns, trading volume, international trade, and executive pay. It reviews detailindependent theoretical motivations that make sharp predictions concerning the existence and coefficients of PLs, without requiring delicate tuning of model parameters. These theoretical mechanisms include random growth, optimization, and the economics of superstars, coupled with extreme value theory. Some empirical regularities currently lack an appropriate explanation. This article highlights these open areas for future research.
710 citations
TL;DR: In this paper, the authors examine whether firm-level idiosyncratic shocks propagate in production networks and find that affected suppliers impose substantial output losses on their customers, especially when they produce specific inputs.
Abstract: This article examines whether firm-level idiosyncratic shocks propagate in production networks. We identify idiosyncratic shocks with the occurrence of natural disasters. We find that affected suppliers impose substantial output losses on their customers, especially when they produce specific inputs. These output losses translate into significant market value losses, and they spill over to other suppliers. Our point estimates are economically large, suggesting that input specificity is an important determinant of the propagation of idiosyncratic shocks in the economy. JEL Codes: L14, E23, E32.
568 citations
TL;DR: In this paper, the authors present a theory of excess stock market volatility, in which market movements are due to trades by very large institutional investors in relatively illiquid markets, and derive the optimal trading behavior of thse investors, which allows them to provide a unified explanation for apparently disconnected empirical regularities in returns, trading volume and investor size.
Abstract: We present a theory of excess stock market volatility, in which market movements are due to trades by very large institutional investors in relatively illiquid markets. Such trades generate significant spikes in returns and volume, even in the absence of important news about fundamentals. We derive the optimal trading behavior of thse investors, which allows us to provide a unified explanation for apparently disconnected empirical regularities in returns, trading volume and investor size.
417 citations
TL;DR: In this paper, linkages between firms through intermediate goods deliver a multiplier similar to the one associated with capital in a neoclassical growth model, and the intermediate goods share of output is about one-half, this multiplier is substantial.
Abstract: What explains the enormous differences in incomes across countries? This paper returns to two old ideas: linkages and complementarity. First, linkages between firms through intermediate goods deliver a multiplier similar to the one associated with capital in a neoclassical growth model. Because the intermediate goods share of output is about one-half, this multiplier is substantial. Second, just as a chain is only as strong as its weakest link, problems along a production chain can sharply reduce output under complementar ity. These forces considerably amplify distortions to the allocation of resources, bringing us closer to understanding large income differ ences across countries.(JEL: D57, E23, O1O, O47)
405 citations
Cites background from "The Granular Origins of Aggregate F..."
...I would like to thank Daron Acemoglu, Andy Atkeson, Pol Antras, Sustanto Basu, Paul Beaudry, Roland Benabou, Olivier Blanchard, Antonio Ciccone, Bill Easterly, Xavier Gabaix, Luis Garicano, Pierre-Olivier Gourinchas, Chang Hsieh, Pete Klenow, John Leahy, Guido Lorenzoni, Kiminori Matsuyama, Ed Prescott, Andres Rodriguez, Dani Rodrik, Richard Rogerson, David Romer, Michele Tertilt, Alwyn Young, and seminar participants at Berkeley, Brown, Chicago, the Chicago GSB, the European Economics Association, the LSE, the NBER EFG and growth meetings, Northwestern, New York University, University of Pennsylvania, Princeton University, the San Francisco Federal Reserve, Stanford University, Toulouse, University of California-Los Angeles, University of Southern California, and the World Bank for helpful comments....
[...]
...Interestingly, the intermediate goods multiplier shows up most clearly in the economic fluctuations literature; see John B. Long Jr. and Charles I. Plosser (1983), Susanto Basu (1995), Julio J. Rotemberg and Michael Woodford (1995), Michael Horvath (1998), Bill Dupor (1999), Timothy G. Conley and Dupor (2003), and Xavier Gabaix (2005)....
[...]
...…multiplier shows up most clearly in the economic fluctuations literature; see John B. Long Jr. and Charles I. Plosser (1983), Susanto Basu (1995), Julio J. Rotemberg and Michael Woodford (1995), Michael Horvath (1998), Bill Dupor (1999), Timothy G. Conley and Dupor (2003), and Xavier Gabaix (2005)....
[...]
...Hence, complementarity is the second main ingredient in this paper....
[...]
References
More filters
TL;DR: A model based on these two ingredients reproduces the observed stationary scale-free distributions, which indicates that the development of large networks is governed by robust self-organizing phenomena that go beyond the particulars of the individual systems.
Abstract: Systems as diverse as genetic networks or the World Wide Web are best described as networks with complex topology. A common property of many large networks is that the vertex connectivities follow a scale-free power-law distribution. This feature was found to be a consequence of two generic mechanisms: (i) networks expand continuously by the addition of new vertices, and (ii) new vertices attach preferentially to sites that are already well connected. A model based on these two ingredients reproduces the observed stationary scale-free distributions, which indicates that the development of large networks is governed by robust self-organizing phenomena that go beyond the particulars of the individual systems.
33,771 citations
Book•
01 Jan 1970
TL;DR: In this article, the official journals of government are produced at their 1.5 million square foot plant, the largest industrial facility in the District and significant issues of outdated plant and equipment.
Abstract: • The official journals of government are produced at their 1.5 million square foot plant, the largest industrial facility in the District. There are significant issues of outdated plant and equipment, failure to meet performance metrics, environmental concerns, safety and security issues, and a significant reduction in staffing over the last decade with only relatively minor workforce development efforts.
5,907 citations
TL;DR: In this article, a general equilibrium model is developed and fitted to U.S. quarterly data for the post-war period, with the assumption that more than one time period is required for the construction of new productive capital and the non-time-separable utility function that admits greater intertemporal substitution of leisure.
Abstract: The equilibrium growth model is modified and used to explain the cyclical variances of a set of economic time series, the covariances between real output and the other series, and the autocovariance of output. The model is fitted to quarterly data for the post-war U.S. economy. Crucial features of the model are the assumption that more than one time period is required for the construction of new productive capital, and the non-time-separable utility function that admits greater intertemporal substitution of leisure. The fit is surprisingly good in light of the model's simplicity and the small number of free parameters. THAT WINE IS NOT MADE in a day has long been recognized by economists (e.g., Bdhm-Bawerk [6]). But, neither are ships nor factories built in a day. A thesis of this essay is that the assumption of multiple-period construction is crucial for explaining aggregate fluctuations. A general equilibrium model is developed and fitted to U.S. quarterly data for the post-war period. The co-movements of the fluctuations for the fitted model are quantitatively consistent with the corresponding co-movements for U.S. data. In addition, the serial correlations of cyclical output for the model match well with those observed. Our approach integrates growth and business cycle theory. Like standard growth theory, a representative infinitely-lived household is assumed. As fluctuations in employment are central to the business cycle, the stand-in consumer values not only consumption but also leisure. One very important modification to the standard growth model is that multiple periods are required to build new capital goods and only finished capital goods are part of the productive capital stock. Each stage of production requires a period and utilizes resources. Halffinished ships and factories are not part of the productive capital stock. Section 2 contains a short critique of the commonly used investment technologies, and presents evidence that single-period production, even with adjustment costs, is inadequate. The preference-technology-information structure of the model is presented in Section 3. A crucial feature of preferences is the non-time-separable utility function that admits greater intertemporal substitution of leisure. The exogenous stochastic components in the model are shocks to technology and imperfect indicators of productivity. The two technology shocks differ in their persistence.
5,728 citations
Book•
01 Jan 1990TL;DR: In this paper, a comprehensive introduction to probability theory covering laws of large numbers, central limit theorem, random walks, martingales, Markov chains, ergodic theorems, and Brownian motion is presented.
Abstract: This book is an introduction to probability theory covering laws of large numbers, central limit theorems, random walks, martingales, Markov chains, ergodic theorems, and Brownian motion. It is a comprehensive treatment concentrating on the results that are the most useful for applications. Its philosophy is that the best way to learn probability is to see it in action, so there are 200 examples and 450 problems.
5,168 citations
01 Jan 1997
3,636 citations
"The Granular Origins of Aggregate F..." refers background in this paper
...The representative agent consumes Ci of good 50L (x) is said to be slowly varying (e.g. Embrechts et al. 1997, p.564) if ∀t > 0, limx→∞ L (tx) /L (x) = 1....
[...]