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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 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 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.

A modern economy is an intricately linked web of specialized production units, each relying on the flow of inputs from their suppliers to produce their own output which, in turn, is routed towards other downstream units. In this essay, I argue that this network perspective on production linkages can offer novel insights on how local shocks occurring along this production network can propagate across the economy and give rise to aggregate fluctuations. First, I discuss how production networks can be mapped to a standard general equilibrium setup. In particular, through a series of stylized examples, I demonstrate how the propagation of sectoral shocks—and hence aggregate volatility— depends on different arrangements of production, that is, on different “shapes” of the underlying production network. Next I explore, from a network perspective, the empirical properties of a large-scale production network as given by detailed US input-output data. Finally I address how theory and data on production networks can be usefully combined to shed light on comovement and aggregate fluctuations.

Using a multisector general equilibrium model, we show that the interplay of idiosyncratic microeconomic shocks and sectoral heterogeneity results in systematic departures in the likelihood of large economic downturns relative to what is implied by the normal distribution. Such departures can emerge even though GDP fluctuations are approximately normally distributed away from the tails, highlighting the different nature of large economic downturns from regular business-cycle fluctuations. We further demonstrate the special role of input-output linkages in generating tail comovements, whereby large recessions involve not only significant GDP contractions, but also large simultaneous declines across a wide range of industries.

We consider infinite-horizon economies populated by a continuum of agents subject to idiosyncratic shocks. This framework contains models of saving and capital accumulation with incomplete markets in the spirit of works by Bewley, Aiyagari, and Huggett; models of entry, exit, and industry dynamics in the spirit of Hopenhayn’s work; and dynamic models of occupational choice and search models as special cases. Robust and easy-to-apply comparative statics results are established with respect to exogenous parameters as well as various kinds of changes in the Markov processes governing the law of motion of the idiosyncratic shocks.

We analyze the effect of green patents on G7 stock market returns. First, we build a small IS-LM model to identify the relevant channels, augmented with open-economy channels and the Green Tobin’s q (Faria et al., 2022). The model highlights that the intertemporal impacts of greening on stock returns are ambiguous. We then turn to an estimated global vector autoregressive model to more rigorously analyze the effect of monetary and green patenting shocks across the G7. Both shocks influence green patents through real and financial markets. As regards green patent shocks, results suggest that a tension exists over time between promoting pollution reduction and energy efficiency and the profitability of (green and brown) companies in the aggregate. We perform a variety of robustness exercises around our main results. Our results provide something of a challenge to the literature and call for more research effort to understand the various channels that might explain this dynamic—and in turn whether any particular policy recommendations follow.

This paper uses a data base covering the universe of French firms for the period 1990–2007 to provide a forensic account of the role of individual firms in generating aggregate fluctuations. We set up a simple multisector model of heterogeneous firms selling to multiple markets to motivate a theoretically founded decomposition of firms' annual sales growth rate into different components. We find that the firm-specific component contributes substantially to aggregate sales volatility, mattering about as much as the components capturing shocks that are common across firms within a sector or country. We then decompose the firm-specific component to provide evidence on two mechanisms that generate aggregate fluctuations from microeconomic shocks highlighted in the recent literature: (i) when the firm size distribution is fat-tailed, idiosyncratic shocks to large firms directly contribute to aggregate fluctuations, and (ii) aggregate fluctuations can arise from idiosyncratic shocks due to input—output linkages across the economy. Firm linkages are approximately three times as important as the direct effect of firm shocks in driving aggregate fluctuations.

This paper investigates the role of the top 100 firms in France in aggregate business cycle comovement. We establish that the top 100 firms (i) are important in aggregate; (ii) exhibit stronger international linkages than the rest of the economy; and (iii) contribute substantially to aggregate comovement.

Using longitudinal data from the Fragile Families and Child Wellbeing Study (N = 4,701; 1998–2010), the authors studied whether the unemployment rate was associated with private financial transfers (PFTs) among urban families with young children and whether family income moderated these associations. They found that an increase in the unemployment rate was associated with greater PFT receipt and that family income moderated the association. Poor and near-poor mothers experienced increases in PFT receipt when unemployment rates were high, whereas mothers with incomes between 2 and 3 times the poverty threshold experienced decreases. Simulations estimating the impact of the Great Recession suggest that moving from 5% to 10% unemployment is associated with a 9-percentage-point increase in the predicted probability of receiving a PFT for the sample as a whole, with greater increases in predicted probabilities among poor and near-poor mothers.

How much news is there in aggregate accounting earnings? I provide evidence that earnings changes at the stock market level are correlated with new information about not only expected future cash flows but also discount rates. A comprehensive investigation of the link to discount rates reveals that aggregate earnings changes are tied to news about all components of the expected future stock market return, i.e., the real riskless rate, expected inflation, and the expected equity risk premium. Over the sample period studied, cash flow news and discount rate news in aggregate earnings changes covary positively and have offsetting impacts on stock market prices. As a result, stock market prices appear to be insensitive to aggregate earnings changes. The findings highlight the importance of separating cash flow news from discount rate news when evaluating the information content of accounting earnings at the stock market level. Overall, my study sheds new light on the informativeness and relevance of accounting earnings for valuation at the stock market level.

We study a general equilibrium model in which entrepreneurs finance investment with optimal financial contracts. Because of enforceability problems, contracts are constrained efficient. We show that limited enforceability amplifies the impact of technological innovations on aggregate output. This implies that economies with lower enforceability of contracts are characterized by greater macroeconomic volatility. A key assumption for the amplification result is that defaulting entrepreneurs are not excluded from the market.