Acemoglu, D., Ozdaglar, A. & Tahbaz-Salehi, A. (2015) “Microeconomic origins of macroeconomic tail risks, VoxEU Organisation, 27 Μαρτίου.
Understanding large economic downturns is one of macroeconomics’ central goals. This column argues that imbalances in input-output linkages can interact with firm-level shocks to produce output fluctuations that are much larger than the underlying shocks. The result can be large cycles arising from small, firm-level shocks. It is thus important to study the determinants of large economic downturns separately. Macroeconomic tail risks may vary significantly even across economies that exhibit otherwise identical behaviour for moderate deviations.
Most empirical studies in macroeconomics approximate the deviations of aggregate economic variables (such as the GDP) from their trends with a normal distribution. Besides analytical convenience, such an approximation has been relatively successful in capturing some of the more salient features of the behaviour of aggregate variables in the US and other OECD countries.
Macroeconomic tail risks
A number of recent studies (see Fagiolo et al. 2008), however, have documented that the distributions of GDP growth rate in the US and many OECD countries do not follow the normal, or bell-shaped distribution. Large negative or positive growth rates are more common than the normal distribution would suggest. That is to say, the distributions exhibit significantly heavier ‘tails’ relative to that of the normal distribution. Using the normal distribution thus severely underpredicts the frequency of large economic downturns.
This divergence can be seen clearly in Figure 1. Panel (a) depicts the quantile-quantile plot of post-war US GDP growth rate (1947:QI to 2013:QIII) versus the normal distribution after removing the top and bottom 5% of data points. The close correspondence between this dataset and the normal distribution, shown as the dashed red line, suggests that once large deviations are excluded, the normal distribution is indeed a good candidate for approximating GDP fluctuations. Panel (b) shows the same quantile-quantile plot for the entire US post-war sample. It is easy to notice that this graph exhibits sizeable and systematic deviations from the normal line at both ends. Together, these plots suggest that even though the normal distribution does a fairly good job in approximating the nature of fluctuations during most of the sample, it severely underestimates the most consequential fact about business cycle fluctuations, namely, the frequency of large economic contractions.
Σχετικές αναρτήσεις:
- Jeffrey D. Sachs, (2015), “The ECB’s New Macroeconomic Realism”, Project Syndicate, 23 Ιανουαρίου.
- Giavazzi, F. & Tabellini, G. (2014) “What macroeconomic policies for the Eurozone?“, VoxEU Organisation, 25 Σεπτεμβρίου.
- Honkkila, J. and Kavonius, I.K., (2013), “Micro and Macro analysis on household income, wealth and saving in the euro area”, European Central Bank, Working Paper No. 1619, Νοέμβριος.