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Heterogeneous Firms and the Micro Origins of Aggregate Fluctuations

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  • Glenn Magerman
  • Karolien De Bruyne
  • Emmanuel Dhyne
  • Jan Van Hove

Abstract

This paper evaluates the impact of idiosyncratic productivity shocks to individual firms on aggregate output. Two sources of firm-level heterogeneity contribute to aggregate fluctuations: (i) asymmetries in supplier-buyer relationships and (ii) the skewed distribution of sales to final demand. We first develop a model with monopolistic competitive firms and derive a generalized centrality measure that takes these two sources of heterogeneity into account. The model is subsequently estimated using unique data on firm-to-firm transactions across all economic activities in Belgium. The model generates aggregate volatility from micro origins in the same order of magnitude as observed volatility in GDP. The top 100 firms contribute to 90% of the volatility generated by the model, underlining a strong granularity of the economy. Counterfactual analysis further shows that both sources of micro heterogeneity contribute substantially to aggregate fluctuations, while the relative contribution of each channel crucially depends on the labor share in the economy.

Suggested Citation

  • Glenn Magerman & Karolien De Bruyne & Emmanuel Dhyne & Jan Van Hove, 2016. "Heterogeneous Firms and the Micro Origins of Aggregate Fluctuations," Working Papers ECARES ECARES 2016-35, ULB -- Universite Libre de Bruxelles.
  • Handle: RePEc:eca:wpaper:2013/239575
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    References listed on IDEAS

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    Cited by:

    1. Andrew B. Bernard & Andreas Moxnes, 2018. "Networks and Trade," Annual Review of Economics, Annual Reviews, vol. 10(1), pages 65-85, August.
    2. Magne Mogstad & Emmanuel Dhyne & Ayumu Kikkawa & Felix Tintelnot, 2017. "Trade and Domestic Production Networks," 2017 Meeting Papers 381, Society for Economic Dynamics.
    3. Julian di Giovanni & Andrei A. Levchenko & Isabelle Mejean, 2018. "The Micro Origins of International Business-Cycle Comovement," American Economic Review, American Economic Association, vol. 108(1), pages 82-108, January.
    4. Spray, J., 2017. "Reorganise, Replace or Expand? The role of the supply-chain in first-time exporting," Cambridge Working Papers in Economics 1741, Faculty of Economics, University of Cambridge.
    5. Yukiko Saito & Makoto Nirei & Vasco Carvalho, 2014. "Supply Chain Disruptions: Evidence from Great East Japan Earthquake," 2014 Meeting Papers 595, Society for Economic Dynamics.
    6. Carvalho, Vasco M & Tahbaz-Salehi, Alireza, 2018. "Production Networks: A Primer," CEPR Discussion Papers 13421, C.E.P.R. Discussion Papers.
    7. MIYAUCHI Yuhei & MIYAKAWA Daisuke, 2017. "Market Thickness, Input-Output Linkages, and Agglomeration," Discussion papers 17072, Research Institute of Economy, Trade and Industry (RIETI).
    8. ITO Keiko & IKEUCHI Kenta & Chiara CRISCUOLO & Jonathan TIMMIS & Antonin BERGEAUD, 2019. "Global Value Chains and Domestic Innovation," Discussion papers 19028, Research Institute of Economy, Trade and Industry (RIETI).
    9. repec:mnb:finrev:v:16:y:2017:i:2:p:40-63 is not listed on IDEAS
    10. Emmanuel Dhyne & Glenn Magerman & Ayumu Ken kikkawa, 2019. "Imperfect Competition in Firm-to-Firm Trade," Working Papers ECARES 2019-05, ULB -- Universite Libre de Bruxelles.
    11. Glenn Magerman & Emmanuel Dhyne & Stela Rubínova, 2015. "The Belgian production network 2002-2012," Working Paper Research 288, National Bank of Belgium.
    12. Olsson, Maria, 2019. "Business Cycles and Production Networks," Working Paper Series 2019:6, Uppsala University, Department of Economics.
    13. Tatsuro Senga & Iacopo Varotto, 2018. "Idiosyncratic shocks and the role of granularity in business cycle," 2018 Meeting Papers 1012, Society for Economic Dynamics.
    14. Cédric Duprez & Glenn Magerman, 2019. "Price Updating with Production Networks," Working Papers ECARES 2019-07, ULB -- Universite Libre de Bruxelles.
    15. Chen Yeh, 2017. "Are firm-level idiosyncratic shocks important for U.S. aggregate volatility?," Working Papers 17-23, Center for Economic Studies, U.S. Census Bureau.
    16. repec:sls:ipmsls:v:34:y:2018:4 is not listed on IDEAS
    17. Cedric Duprez & Glenn Magerman, 2018. "Price Updating in Production Networks," Working Paper Research 352, National Bank of Belgium.
    18. Chen Yeh, 2016. "Are firm-level idiosyncratic shocks important for U.S. aggregate volatility?," Working Papers 16-47, Center for Economic Studies, U.S. Census Bureau.
    19. Kevin Lim, 2017. "Firm-to-firm Trade in Sticky Production Networks," 2017 Meeting Papers 280, Society for Economic Dynamics.

    More about this item

    Keywords

    heterogeneous firms; networks; input-output linkages; aggregate volatility;

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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