The Network Origins of Large Economic Downturns
Coauthor(s): Daron Acemoglu, Asuman Ozdaglar.
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This paper shows that large economic downturns may result from the propagation of microeconomic
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 intersectoral 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.
Acemoglu, Daron, Asuman Ozdaglar, and Alireza Tahbaz-Salehi. "The Network Origins of Large Economic Downturns." Columbia Business School, June 2013.