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The Role of Firm Heterogeneity for the Transmission of Aggregate Shocks

Author

Listed:
  • Lenza, Michele

    (European Central Bank)

  • Pagano Giorgianni, Giuseppe

    (Sapienza University of Rome)

  • Rossi, Lorenza

    (Lancaster University)

  • Savoia, Ettore

    (Research Department, Central Bank of Sweden)

Abstract

We study whether firm-level heterogeneity helps explain U.S. macroeconomic fluctuations in response to aggregate shocks. Using quarterly Compustat and CRSP data from 1986 to 2025, we construct two revenue-based statistics inspired by the Melitz (2003) model: the average firm and the marginal near-default firm. These statistics summarize key features of the firm distribution. We augment a Bayesian VAR with these measures and compare its performance to a standard aggregate VAR and to a functional VAR that incorporates the full cross-sectional distribution of firm revenues. We find that firm-level heterogeneity contains information not captured by aggregate variables. Including the two statistics allows the VAR to closely replicate the impulse responses obtained using the functional VAR and improves out-of-sample forecast accuracy. These findings are robust to a replication using UK data.

Suggested Citation

  • Lenza, Michele & Pagano Giorgianni, Giuseppe & Rossi, Lorenza & Savoia, Ettore, 2026. "The Role of Firm Heterogeneity for the Transmission of Aggregate Shocks," Working Paper Series 465, Sveriges Riksbank (Central Bank of Sweden).
    • Handle: RePEc:hhs:rbnkwp:0465
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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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