Microeconomic Origins of Macroeconomic Tail Risks

Using a multisector general equilibrium model, we show that the interplay of idiosyncratic microeconomic shocks and sectoral heterogeneity results in systematic departures in the likelihood of large economic downturns relative to what is implied by the normal distribution. Such departures can emerge even though GDP fluctuations are approximately normally distributed away from the tails, highlighting the different nature of large economic downturns from regular business-cycle fluctuations. We further demonstrate the special role of input-output linkages in generating tail comovements, whereby large recessions involve not only significant GDP contractions, but also large simultaneous declines across a wide range of industries

Innovation network

Technological progress builds upon itself, with the expansion of invention in one domain propelling future work in linked fields. Our analysis uses 1.8 million US patents and their citation properties to map the innovation network and its strength. Past innovation network structures are calculated using citation patterns across technology classes during 1975–1994. The interaction of this preexisting network structure with patent growth in upstream technology fields has strong predictive power on future innovation after 1995. This pattern is consistent with the idea that when there is more past upstream innovation for a particular technology class to build on, then that technology class innovates more

Enabling low-carbon development in poor countries

The challenges associated with achieving sustainable development goals and stabilizing the world’s climate cannot be solved without significant efforts by developing and newly-emerging countries. With respect to climate change mitigation, the main challenge for developing countries lies in avoiding future emissions and lock-ins into emission-intensive technologies, rather than reducing today’s emissions. While first best policy instruments like carbon prices could prevent increasing carbonization, those policies are often rejected by developing countries out of a concern for negative repercussions on development and long-term growth. In addition, policy environments in developing countries impose particular challenges for regulatory policy aiming to incentivize climate change mitigation and sustainable development. This chapter first discusses how climate policy could potentially interact with sustainable development and economic growth. It focuses, in particular, on the role of industrial sector development. The chapter then continues by discussing how effective policy could be designed, specifically taking developing country circumstances into account