From Micro to Macro: Micro-Foundations of the Italian Business Cycle Co-movements During the Crises

In this paper we study the direct and indirect contributions of firms to the co-movements between Italian business cycle and those of the 10 main trading partners. In doing so, we follow the approach developed by di Giovanni et al. (Am Econ Rev 108(1): 82–108, 2018) considering the 2005–2017 period, during which Italian economy experienced two different crises. Moreover, we propose a refinement in the estimation methodology originally used in the related literature by applying fractional response models for panel data, in order to take into account the bounded nature of data. Our findings show that firms’ trade linkages largely prevail over productive ones to explain the correlation between Italian firms’ value added and trading partners GDP growth. Furthermore, in presence of a small group of internationalized firms and a large group of small and not internationalized firms, the Italian business cycle correlation is mainly explained by the former group, because of both their direct links and indirect activation effects on the rest of the system. Our empirical approach also shows that using a linear FE estimator would result in a biased estimation of both indirect and direct effects.