Econometrica: Jul, 2019, Volume 87, Issue 4
The Macroeconomic Impact of Microeconomic Shocks: Beyond Hulten's Theorem
https://doi.org/10.3982/ECTA15202
p. 1155-1203
David Rezza Baqaee, Emmanuel Farhi
We provide a nonlinear characterization of the macroeconomic impact of microeconomic productivity shocks in terms of reducedâform nonparametric elasticities for efficient economies. We also show how microeconomic parameters are mapped to these reducedâform 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 firstâorder 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 businessâcycle calibration with sectoral shocks, nonlinearities magnify negative shocks and attenuate positive shocks, resulting in an aggregate output distribution that is asymmetric (negative skewness), fatâtailed (excess kurtosis), and has a negative mean, even when shocks are symmetric and thinâtailed. Average output losses due to shortârun 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 longârun growth context, nonlinearities, which underpin Baumol's cost disease via the increase over time in the sales shares of lowâgrowth bottleneck sectors, account for a 20 percentage point reduction in aggregate TFP growth over the period 1948â2014 in the United States.
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