The macroeconomic impact of microeconomic shocks: Beyond Hulten’s theorem
BibTeX
@article{baqaee2019macroeconomic,
title={The macroeconomic impact of microeconomic shocks: Beyond Hulten's theorem},
author={Baqaee, David Rezza and Farhi, Emmanuel},
journal={Econometrica},
volume={87},
number={4},
pages={1155--1203},
year={2019},
publisher={Wiley Online Library}
}
Abstract
We provide a nonlinear characterization of the macroeconomic impact of microeconomic productivity shocks in terms of reduced-form nonparametric elasticities for efficient economies. We also show how microeconomic parameters are mapped to these reduced-form general equilibrium elasticities. In this sense, we extend the foundational theorem of Hulten (1978) beyond the first order to capture nonlinearities. Key features ignored by first-order approximations that play a crucial role are: structural microeconomic elasticities of substitution, network linkages, structural microeconomic returns to scale, and the extent of factor reallocation. In a business-cycle calibration with sectoral shocks, nonlinearities magnify negative shocks and attenuate positive shocks, resulting in an aggregate output distribution that is asymmetric (negative skewness), fat-tailed (excess kurtosis), and has a negative mean, even when shocks are symmetric and thin-tailed. Average output losses due to short-run sectoral shocks are an order of magnitude larger than the welfare cost of business cycles calculated by Lucas (1987). Nonlinearities can also cause shocks to critical sectors to have disproportionate macroeconomic effects, almost tripling the estimated impact of the 1970s oil shocks on world aggregate output. Finally, in a long-run growth context, nonlinearities, which underpin Baumol’s cost disease via the increase over time in the sales shares of low-growth bottleneck sectors, account for a 20 percentage point reduction in aggregate TFP growth over the period 1948–2014 in the United States.
Notes and excerpts
good teaching example
Domar weight for a firm is the firm’s sales as a fraction of gdp In this paper, the Domar weight is written
\[\lambda_i = \frac{p_i y_i}{\sum_j p_j c_j}\]The $y$s here are the outputs of the firm. And there is no investment / gov spending / intr trade, so sum of price weight consumption is GDP.
Paper is based on a Taylor expansion of order two.