International Trade and Aggregate Fluctuations in Granular Economies
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.
|Date of creation:||Feb 2009|
|Date of revision:|
|Contact details of provider:|| Postal: ANN ARBOR MICHIGAN 48109|
Phone: (734) 764-3490
Fax: (734) 763-9181
Web page: http://fordschool.umich.edu/rsie/
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:mie:wpaper:585. 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: (FSPP Webmaster)
If references are entirely missing, you can add them using this form.