Comment on "Networks and the Macroeconomy: An Empirical Exploration"

This is a discussion of “Networks and the macroeconomy: an empirical exploration,” by Acemoglu, Akcigit and Kerr, prepared for the NBER Macro Annual 2015. It also serves as an user-friendly guide to a stream of literature exploring the hypothesis that a good part of macro fluctuations can be traced to to micro (sectoral or firm-level) shocks. Discussions of published papers are seldom read. Certainly they are almost never cited. So, how to make good use those Macro Annual pages? I thought it might be useful to write a user-friendly introduction to the ideas underlying Acemoglu, Akcigit and Kerr (AAK)’s very interesting paper: the “macro from micro shocks”approach that started with Long and Plosser (1983), something I’ve also called the “granular”hypothesis (Gabaix 2011).1 In that view, the primitive shocks to the economy are not mysterious aggregate productivity shocks, or aggregate demand shocks, but understandable shocks to Nokia, Microsoft, ∗xgabaix@stern.nyu.edu. I thank Daron Acemoglu for helpful comments, and Chenxi Wang for editorial assistance. 1I build on earlier surveys on power laws, Gabaix (2009, 2015). 1 demand for Boieng planes, etc. This may explain the behavior of significant macro aggregates, and in general be a great, fecund source of insight for macro. I’ll explain why I think that this approach is promising; as a preview, the main reasons are as follows. 1. Micro shocks may be important to understand the business cycle: rather than “there was a [mysterious] productivity shock”, we can have more concrete and understandable explanations like “there was a strike at General Motors”, “there was large demand for Boeing planes”, “Nokia lost market share”, etc. They may also be quite important quantitatively, with some estimates (reviewed below) attributing to them 30-50% of GDP fluctuations. 2. They allow us to understand the origins of volatility. 3. They’re a source of (plausible) instruments for macroeconomics —something very rare and precious. 4. They may allow us to understand the nature of “multipliers” 5. They allows to trace how a shock propagates the broad economy: this is what AAK does particularly well. 6. They ought to be useful for predictions. 7. They have a great promise for international transmission, e.g. of Fed shocks to the exchange rate, exports etc. I like AAK’s paper a lot. It has useful analytics and interesting empirics. I trust that it will be imitated by other teams, with other data sets. Let me show it integrates in this broader context. 2 1 How micro shocks affect macro outcomes I start with a basic question. What’s the impact of a micro TFP shock on the macroeconomy? Perhaps surprisingly, one can obtain a clean definite answer to that. 1.1 What’s the impact of a TFP shock? To see this, we need some notations. Suppose a general economy with N goods. The representative consumer’s utility is u (c1, ..., cN), firm i (or “sector”i —I use the term interchangeably; I think that firms are more concrete, and help the intuition) produces Gross output of firm i: Yi = eiF i ( Li, Ki, (Xij)j=1...N ) (1) using labor Li, capital Ki, and inputs Xij = Xi←j from firm j. The net production of good i goes into consumption: Net output of good i: Yi − ∑