Journal Article

THE NETWORK ORIGINS OF AGGREGATE FLUCTUATIONS

Ozdaglar, Asuman, Acemoglu, Daron, Tahbaz-Salehi, Alireza, Carvalho, Vasco M.

2012

Overview

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.

• Publisher: Econometric Society,Blackwell Publishing Ltd,Wiley-Blackwell
• Subject: Aggregate analysis / Aggregate economy / aggregate volatility / Applications / Applied economics / Business cycle / Business cycles / cascades / Construction aggregate / Consumers / Customers / diversification / Economic fluctuations / Economic models / Economic sectors / Economic theory / Exact sciences and technology / Input output / Input output analysis / input–output linkages / Insurance, economics, finance / Interconnections / intersectoral network / Mathematical analysis / Mathematics / Microeconomics / Network economies / Partial differential equations / Probability and statistics / Productivity / Sciences and techniques of general use / Statistics / Studies / Volatility