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

  • Julian di Giovanni
  • Andrei A. Levchenko

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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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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