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Country Size, International Trade, and Aggregate Fluctuations in Granular Economies

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  • Julian di Giovanni
  • Andrei A. Levchenko

Abstract

This paper proposes a new mechanism by which country size and international trade affect macroeconomic volatility. We study a model with heterogeneous firms that are subject to idiosyncratic firm-specific shocks, calibrated to data for the 50 largest economies in the world. When the firm size distribution follows a power law with an exponent close to minus one, idiosyncratic shocks to large firms have an impact on aggregate volatility. Smaller countries have fewer firms and, thus, higher volatility. Trade opening makes the large firms more important, thus raising macroeconomic volatility. Trade can increase aggregate volatility by 15–20 percent in some small open economies.

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File URL: http://www.jstor.org/stable/pdfplus/10.1086/669161
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File URL: http://www.jstor.org/stable/full/10.1086/669161
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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 120 (2012)
Issue (Month): 6 ()
Pages: 1083 - 1132

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Handle: RePEc:ucp:jpolec:doi:10.1086/669161

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References

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Citations

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Cited by:
  1. Didier, Tatiana & Schmukler, Sergio L., 2013. "The financing and growth of firms in China and India : evidence from capital markets," Policy Research Working Paper Series 6401, The World Bank.
  2. Jörn Kleinert & Julien Martin & Farid Toubal, 2012. "The Few Leading the Many: Foreign Affiliates and Business Cycle Comovement," Working Papers 2012-18, CEPII research center.
  3. Kazuo Nishimura & Alain Venditti & Makoto Yano, 2014. "Destabilization effect of international trade in a perfect foresight dynamic general equilibrium model," Economic Theory, Springer, vol. 55(2), pages 357-392, February.
  4. Julian di Giovanni & Andrei A. Levchenko, 2009. "Firm Entry, Trade, and Welfare in Zipf's World," Working Papers 591, Research Seminar in International Economics, University of Michigan.
  5. Sari Pekkala Kerr & William R. Kerr & William F. Lincoln, 2014. "Firms and the Economics of Skilled Immigration," NBER Chapters, in: Innovation Policy and the Economy, Volume 15 National Bureau of Economic Research, Inc.
  6. Marc J. Melitz & Stephen J. Redding, 2012. "Heterogeneous Firms and Trade," CEP Discussion Papers dp1183, Centre for Economic Performance, LSE.
  7. del Rosal, Ignacio, 2013. "The granular hypothesis in EU country exports," Economics Letters, Elsevier, vol. 120(3), pages 433-436.
  8. Jinjarak, Yothin & Mutuc, Paulo Jose & Wignaraja, Ganeshan, 2014. "Does Finance Really Matter for the Participation of SMEs in International Trade? Evidence from 8,080 East Asian Firms," ADBI Working Papers 470, Asian Development Bank Institute.

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