Financial crises, firm‐level shocks and large downturns: Evidence from Greece

How do firm‐specific shocks contribute to large economic downturns associated with financial crises? Using a large and representative dataset on Greek firms covering all sectors of the economy over the period 2000–2014, we find that the contribution of firm‐specific shocks to the volatility of aggregate sales growth increased substantially (about 30%) during the Greek financial crisis and dominated the contribution of macro‐economic and sectoral shocks. We also find that, throughout the sample period, inter‐firm linkages are two and a half times as important as the direct effect of firm shocks in driving aggregate fluctuations. However, during the financial crisis, the Greek economy became more granular, and the direct effect of firm‐specific shocks had increased importance in driving aggregate volatility.