skip to content

Faculty of Economics

Journal Cover

Carvalho, V. M. and Gabaix, X.

The great diversification and its undoing

American Economic Review

Vol. 103(5) pp. 1697-1727 (2013)

Abstract: We investigate the hypothesis that macroeconomic fluctuations are primitively the results of many microeconomic shocks. We define fundamental volatility as the volatility that would arise from an economy made entirely of idiosyncratic sectoral or firm-level shocks. Fundamental volatility accounts for the swings in macroeconomic volatility in the major world economies in the past half-century. It accounts for the "great moderation" and its undoing. The initial great moderation is due to a decreasing share of manufacturing between 1975 and 1985. The recent rise of macroeconomic volatility is chiefly due to the growth of the financial sector.

JEL Codes: E23, E32, E44

Author links: Vasco Carvalho  

Publisher's Link: http://dx.doi.org/10.1257/aer.103.5.1697



Papers and Publications



Recent Publications


Galeotti, A., Golub, B. and Goyal, S. Targeting Interventions in Networks Econometrica, forthcoming [2020]

Faraglia, E., Marcet, A., Oikonomou, R. and Scott, A. Government Debt management: the Short and the Long of it Review of Economic Studies [2019]

Goyal, S. Society and Economy: Frameworks and Principles: A Book Review Journal of Economic Literature [2019]

Vogt, M., Linton, O. Multiscale clustering of nonparametric regression curves Journal of Econometrics [2020]