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International Trade and Aggregate Fluctuations in Granular Economies

  • Julian di Giovanni

    (International Monetary Fund)

  • Andrei A. Levchenko

    (University of Michigan and International Monetary Fund)

This paper proposes a new channel through which international trade affects macroeconomic volatility. We study a multi-country model with heterogeneous firms that are subject to idiosyncratic firm-specific shocks. When the distribution of firm size follows a power law with exponent sufficiently close to -1, the idiosyncratic shocks to large Þrms have an impact on aggregate volatility. Opening to trade increases the importance of large Þrms to the economy, thus raising macroeconomic volatility. We next explore the quantitative properties of the model calibrated to data for the 50 largest economies in the world. Our simulation exercise shows that the contribution of trade to aggregate ßuctuations depends strongly on country size: in an economy such as the U.S., that accounts for one-third of world GDP, international trade increases volatility by about 3.5%. By contrast, trade increases aggregate volatility by some 30% in a small open economy, such as Belgium or Poland. The model performs well in matching the elasticity of macroeconomic volatility with respect to country size observed in cross-country data.

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File URL: http://www.fordschool.umich.edu/rsie/workingpapers/Papers576-600/r585.pdf
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Paper provided by Research Seminar in International Economics, University of Michigan in its series Working Papers with number 585.

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Length: 45 pages
Date of creation: Feb 2009
Date of revision:
Handle: RePEc:mie:wpaper:585
Contact details of provider: Postal: ANN ARBOR MICHIGAN 48109
Web page: http://fordschool.umich.edu/rsie/
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  1. Julian di Giovanni & Andrei A. Levchenko, 2009. "Trade Openness and Volatility," The Review of Economics and Statistics, MIT Press, vol. 91(3), pages 558-585, August.
  2. Andrew Bernard & J. Bradford Jensen & Peter Schott, 2003. "Falling Trade Costs, Heterogeneous Firms, and Industry Dynamics," IFS Working Papers W03/10, Institute for Fiscal Studies.
  3. Gadi Barlevy, 2003. "The cost of business cycles under endogenous growth," Working Paper Series WP-03-13, Federal Reserve Bank of Chicago.
  4. Costas Arkolakis, 2010. "Market Penetration Costs and the New Consumers Margin in International Trade," Journal of Political Economy, University of Chicago Press, vol. 118(6), pages 1151 - 1199.
  5. George Alessandria & Horag Choi, 2007. "Do Sunk Costs of Exporting Matter for Net Export Dynamics?," The Quarterly Journal of Economics, MIT Press, vol. 122(1), pages 289-336, 02.
  6. Xavier Gabaix, 2009. "The Granular Origins of Aggregate Fluctuations," NBER Working Papers 15286, National Bureau of Economic Research, Inc.
  7. Canning, D. & Amaral, L. A. N. & Lee, Y. & Meyer, M. & Stanley, H. E., 1998. "Scaling the volatility of GDP growth rates," Economics Letters, Elsevier, vol. 60(3), pages 335-341, September.
  8. Stephane Pallage & Michel A. Robe, 2003. "On the Welfare Cost of Economic Fluctuations in Developing Countries," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(2), pages 677-698, 05.
  9. Muge Adalet, 2009. "Multi-Product Exporters and Product Turnover Behaviour of New Zealand Exporters," Treasury Working Paper Series 09/01, New Zealand Treasury.
  10. Gatti, Domenico Delli & Guilmi, Corrado Di & Gaffeo, Edoardo & Giulioni, Gianfranco & Gallegati, Mauro & Palestrini, Antonio, 2005. "A new approach to business fluctuations: heterogeneous interacting agents, scaling laws and financial fragility," Journal of Economic Behavior & Organization, Elsevier, vol. 56(4), pages 489-512, April.
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