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The elastic origins of tail asymmetry

Published online by Cambridge University Press:  27 April 2023

Satoshi Nakano  and
Kazuhiko Nishimura
Satoshi Nakano
Affiliation:
Nihon Fukushi University, Tokai, Japan
Kazuhiko Nishimura*
Affiliation:
Chukyo University, Nagoya, Japan
*
*Corresponding author: Email: nishimura@lets.chukyo-u.ac.jp
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Abstract

Based on a multisector general equilibrium framework, we show that the sectoral elasticity of substitution plays the key role in the evolution of asymmetric tails of macroeconomic fluctuations and the establishment of robustness against productivity shocks. A non-unitary elasticity of substitution renders a nonlinear Domar aggregation, where normal sectoral productivity shocks translate into non-normal aggregated shocks with variable expected output growth. We empirically estimate 100 sectoral elasticities of substitution, using the time-series linked input-output tables for Japan and find that the production economy is elastic overall, relative to a Cobb-Douglas economy with unitary elasticity. In addition to the previous assessment of an inelastic production economy for the USA, the contrasting tail asymmetry of the distribution of aggregated shocks between the USA and Japan is explained. Moreover, the robustness of an economy is assessed by expected output growth, the level of which is led by the sectoral elasticities of substitution under zero-mean productivity shocks.

Keywords

Productivity propagationStructural transformationElasticity of substitutionAggregate fluctuationsRobustnessD57E23E32
Type
Articles
Information
Macroeconomic Dynamics , Volume 28 , Issue 3 , April 2024 , pp. 591 - 611
Copyright
© The Author(s), 2023. Published by Cambridge University Press

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