Aggregate Fluctuations in a Sectorial Economy: a network analysis

Business cycle analysis has always been at the core of macroeconomic thinking and empirics; notwithstanding the recent crisis has high- lighted the lack of economic tools able both to describe and forecast such widespread phenomena. It has been found the need for the under- standing of the degree of interconnection between agents within and across countries and its implications in national economies. In light of this necessity many scholars have tried to address the issue of intercon- nection, but their focus was limited to the financial sector. In this thesis I face the more general topic concerning the determination of aggregate output volatility: by drawing from the seminal work of Acemoglu et al. (2012), who stated an important mathematical result in terms of first and higher order effects (namely, cascades) of idiosyncratic shocks, and from the theory of networks, I develop a microfounded model of a sectorial economy with heterogeneous sectors and consumers, with the aim of deriving the aggregate effects in terms of output volatility of small idiosyncratic shocks. The analysis is undertaken at the meso- level, where connections between sectors are defined by means of an Input/Output structure, which in turn allows for the characterisation of the network of the economy. The model is then estimated by means of parametric and nonparamtric methods applied on both European and U.S. Input/Output tables firstly to catch the implications of dif- ferent economic structures on shock transmission; then the hypothesis of idiosyncratic origin of aggregate fluctuations is tested by means of comparative statics analysis. Concluding, the model is provided and simulated in order to check two important issues: the timing of per- colation and the medium run, aggregate effects of idiosyncratic shocks on the topology of the network