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Power laws and the origins of aggregate fluctuations

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  • Xavier Gabaix
Abstract
If firm sizes have a small dispersion, microeconomic shocks lead to negligible aggregate fluctuations. This has led economists to appeal to macroeconomic (sectoral or aggregate shocks) shocks to explain aggregate fluctuations. However, the empirical distribution of firms is fat-tailed. This paper shows how, in a world with fat-tailed firm size distribution, idiosyncratic fluctuations aggregate up to non-trivial macro fluctuations. We illustrate how this happens, and contend that business cycle shocks come in large part from idiosyncratic shocks to firms. We show empirically that idiosyncratic volatility is indeed large enough to account for GDP volatility. This mechanism could, potentially, explain a large part of the volatility of a variety of aggregate quantities: business cycle fluctuations, inventories, inflation, medium or long run movements in productivity, and the current account

Suggested Citation

  • Xavier Gabaix, 2004. "Power laws and the origins of aggregate fluctuations," Econometric Society 2004 North American Summer Meetings 484, Econometric Society.
  • Handle: RePEc:ecm:nasm04:484
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    References listed on IDEAS

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    Cited by:

    1. Gatti, Domenico Delli & Guilmi, Corrado Di & Gaffeo, Edoardo & Giulioni, Gianfranco & Gallegati, Mauro & Palestrini, Antonio, 2005. "A new approach to business fluctuations: heterogeneous interacting agents, scaling laws and financial fragility," Journal of Economic Behavior & Organization, Elsevier, vol. 56(4), pages 489-512, April.
    2. Andrei A. Levchenko, 2005. "Financial Liberalization and Consumption Volatility in Developing Countries," IMF Staff Papers, Palgrave Macmillan, vol. 52(2), pages 237-259, September.
    3. Domenico Delli Gatti & Edoardo Gaffeo & Mauro Gallegati & Antonio Palestrini, 2005. "The Apprentice Wizard: Montetary Policy, Complexity And Learning," New Mathematics and Natural Computation (NMNC), World Scientific Publishing Co. Pte. Ltd., vol. 1(01), pages 109-128.
    4. Erzo G. J. Luttmer, 2004. "The size distribution of firms in an economy with fixed and entry costs," Working Papers 633, Federal Reserve Bank of Minneapolis.

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    More about this item

    Keywords

    idiosyncratic shocks; aggregate fluctuations; power laws; fat tails; macroeconomic fluctuations;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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