International Trade and Aggregate Fluctuations in Granular Economies
AbstractThis paper proposes a new channel through which international trade affects macroeconomic volatility. We study a multi-country model with heterogeneous firms that are subject to idiosyncratic firm-specific shocks. When the distribution of firm size follows a power law with exponent sufficiently close to -1, the idiosyncratic shocks to large Þrms have an impact on aggregate volatility. Opening to trade increases the importance of large Þrms to the economy, thus raising macroeconomic volatility. We next explore the quantitative properties of the model calibrated to data for the 50 largest economies in the world. Our simulation exercise shows that the contribution of trade to aggregate ßuctuations depends strongly on country size: in an economy such as the U.S., that accounts for one-third of world GDP, international trade increases volatility by about 3.5%. By contrast, trade increases aggregate volatility by some 30% in a small open economy, such as Belgium or Poland. The model performs well in matching the elasticity of macroeconomic volatility with respect to country size observed in cross-country data.
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Bibliographic InfoPaper provided by Research Seminar in International Economics, University of Michigan in its series Working Papers with number 585.
Length: 45 pages
Date of creation: Feb 2009
Date of revision:
Macroeconomic Volatility; Firm-SpeciÞc Idiosyncratic Shocks; Large Firms; International Trade;
Other versions of this item:
- Andrei A. Levchenko & Julian di Giovanni, 2009. "International Trade and Aggregate Fluctuations in Granular Economies," 2009 Meeting Papers 491, Society for Economic Dynamics.
- F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
- F15 - International Economics - - Trade - - - Economic Integration
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-03-28 (All new papers)
- NEP-INT-2009-03-28 (International Trade)
- NEP-MAC-2009-03-28 (Macroeconomics)
- NEP-OPM-2009-03-28 (Open Economy Macroeconomic)
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