IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Are firm-level idiosyncratic shocks important for U.S. aggregate volatility?

Listed author(s):
  • Chen Yeh
Registered author(s):

    This paper assesses the quantitative impact of firm-level idiosyncratic shocks on aggregate volatility in the U.S. economy and provides a microfoundation for the negative relationship between firm-level volatility and size. I argue that the role of firm-specific shocks through the granular channel plays a fairly limited role in the U.S. economy. Using a novel, comprehensive data set compiled from several sources of the U.S. Census Bureau, I find that the granular com-ponent accounts at most for 15.5% of the variation in aggregate sales growth which is about half found by previous studies. To bridge the gap between previous findings and mine, I show that my quantitative results require deviations from Gibrat’s law in which firm-level volatility and size are negatively related. I find that firm-level volatility declines at a substantially higher rate in size than previously found. Hence, the largest firms in the economy cannot be driving a sub-stantial fraction of macroeconomic volatility. I show that the explanatory power of granularity gets cut by at least half whenever the size-variance relationship, as estimated in the micro-level data, is taken into account. To uncover the economic mechanism behind this phenomenon, I construct an analytically tractable framework featuring random growth and a Kimball aggrega-tor. Under this setup, larger firms respond less to productivity shocks as the elasticity of demand is decreasing in size. Additionally, the model predicts a positive (negative) relationship between firm-level mark-ups (growth) and size. I confirm the predictions of the model by estimating size-varying price elasticities on unique product-level data from the Census of Manufactures (CM) and structurally estimating mark-ups using plant-level information from the Annual Survey of Manufactures (ASM).

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: https://www2.census.gov/ces/wp/2016/CES-WP-16-47.pdf
    File Function: First version, 2016
    Download Restriction: no

    Paper provided by Center for Economic Studies, U.S. Census Bureau in its series Working Papers with number 16-47.

    as
    in new window

    Length: 73 pages
    Date of creation: Jan 2016
    Handle: RePEc:cen:wpaper:16-47
    Contact details of provider: Postal:
    4600 Silver Hill Road, Washington, DC 20233

    Phone: (301) 763-6460
    Fax: (301) 763-5935
    Web page: http://www.census.gov/ces
    Email:


    More information through EDIRC

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as
    in new window


    1. Glenn Magerman & Karolien De Bruyne & Emmanuel Dhyne & Jan Van Hove, 2016. "Heterogeneous firms and the micro origins of aggregate fluctuations," Working Paper Research 312, National Bank of Belgium.
    2. Robert C. Feenstra, 2014. "Restoring the Product Variety and Pro-competitive Gains from Trade with Heterogeneous Firms and Bounded Productivity," NBER Working Papers 19833, National Bureau of Economic Research, Inc.
    3. repec:red:issued:15-260 is not listed on IDEAS
    4. Steven J. Davis & John Haltiwanger & Ron Jarmin & Javier Miranda, 2007. "Volatility and Dispersion in Business Growth Rates: Publicly Traded versus Privately Held Firms," NBER Chapters,in: NBER Macroeconomics Annual 2006, Volume 21, pages 107-180 National Bureau of Economic Research, Inc.
    5. Andrew Atkeson & Ariel Burstein, 2008. "Pricing-to-Market, Trade Costs, and International Relative Prices," American Economic Review, American Economic Association, vol. 98(5), pages 1998-2031, December.
    6. Teresa C Fort & John Haltiwanger & Ron S Jarmin & Javier Miranda, 2013. "How Firms Respond to Business Cycles: The Role of Firm Age and Firm Size," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 61(3), pages 520-559, August.
    7. John Haltiwanger & Ron S. Jarmin & Robert Kulick & Javier Miranda, 2016. "High Growth Young Firms: Contribution to Job, Output, and Productivity Growth," NBER Chapters,in: Measuring Entrepreneurial Businesses: Current Knowledge and Challenges, pages 11-62 National Bureau of Economic Research, Inc.
    8. David Atkin & Azam Chaudhry & Shamyla Chaudhry & Amit K. Khandelwal & Eric Verhoogen, 2015. "Markup and Cost Dispersion across Firms: Direct Evidence from Producer Surveys in Pakistan," American Economic Review, American Economic Association, vol. 105(5), pages 537-544, May.
    9. Amit Gandhi & Salvador Navarro & David Rivers, 2011. "On the Identification of Production Functions: How Heterogeneous is Productivity?," University of Western Ontario, Centre for Human Capital and Productivity (CHCP) Working Papers 20119, University of Western Ontario, Centre for Human Capital and Productivity (CHCP).
    10. A. R. Lamorgese & A. Linarello & Frederic Warzynski, 2014. "Free Trade Agreements and Firm-Product Markups in Chilean Manufacturing," Economics Working Papers 2014-16, Department of Economics and Business Economics, Aarhus University.
    11. Costas Arkolakis, 2016. "A Unified Theory of Firm Selection and Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 131(1), pages 89-155.
    12. Enghin Atalay, 2014. "Materials Prices And Productivity," Journal of the European Economic Association, European Economic Association, vol. 12(3), pages 575-611, June.
    13. Carvalho, Vasco M & Grassi, Basile, 2015. "Large Firm Dynamics and the Business Cycle," CEPR Discussion Papers 10587, C.E.P.R. Discussion Papers.
    14. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
    15. Seker, Murat, 2009. "A structural model of establishment and industry evolution : evidence from Chile," Policy Research Working Paper Series 4947, The World Bank.
    16. Costas Arkolakis & Theodore Papageorgiou & Olga Timoshenko, . "Firm Learning and Growth," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.
      • Costas Arkolakis & Theodore Papageorgiou & Olga A. Timoshenko, 2015. "Firm Learning and Growth," Working Papers 2015-5, The George Washington University, Institute for International Economic Policy.
    17. Ron S Jarmin & Javier Miranda, 2002. "The Longitudinal Business Database," Working Papers 02-17, Center for Economic Studies, U.S. Census Bureau.
    18. T. Kirk White, 2014. "Recovering The Item-Level Edit And Imputation Flags In The 1977-1997 Censuses Of Manufactures," Working Papers 14-37, Center for Economic Studies, U.S. Census Bureau.
    19. Nicholas Bloom & Erik Brynjolfsson & Lucia Foster & Ron Jarmin & Itay Saporta-Eksten & John Van Reenen, 2013. "Management in America," Working Papers 13-01, Center for Economic Studies, U.S. Census Bureau.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:cen:wpaper:16-47. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Erica Coates)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.