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The macroeconomic impact of microeconomic shocks: beyond Hulten's Theorem

Baqaee, David Rezza and Farhi, Emmanuel (2017) The macroeconomic impact of microeconomic shocks: beyond Hulten's Theorem. CFM Discussion Paper Series (CFM-DP2017-34). Centre For Macroeconomics, London, UK.

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Abstract

We provide a nonlinear characterization of the macroeconomic impact of microeconomic productivity shocks in terms of reduced-form non-parametric elasticities for efficient economies. We also show how structural parameters are mapped to these reduced-form elasticities. In this sense, we extend the foundational theorem of Hulten (1978) beyond first-order terms. Key features ignored by first-order approximations that play a crucial role are: structural elasticities of substitution, network linkages, structural returns to scale, and the extent of factor reallocation. Higher-order terms magnify negative shocks and attenuate positive shocks, resulting in an output distribution that is asymmetric, fat-tailed, and has a lower mean even when shocks are symmetric and thin-tailed. In our calibration, output losses due to business-cycle fluctuations are an order of magnitude larger than the cost calculated by Lucas (1987). Second-order terms also show how shocks to critical sectors can have large macroeconomic impacts, tripling the estimated impact of the 1970s oil price shocks.

Item Type: Monograph (Discussion Paper)
Official URL: http://www.centreformacroeconomics.ac.uk/Discussio...
Additional Information: © 2017 The Authors
Divisions: Centre for Macroeconomics
Subjects: H Social Sciences > HB Economic Theory
Sets: Research centres and groups > Centre for Macroeconomics
Date Deposited: 12 Mar 2018 16:58
Last Modified: 04 Jul 2020 23:07
URI: http://eprints.lse.ac.uk/id/eprint/87167

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