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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
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  1. 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.
  2. Xavier Gabaix, 2011. "The Granular Origins of Aggregate Fluctuations," Econometrica, Econometric Society, vol. 79(3), pages 733-772, 05.
  3. Claudia Canals & Xavier Gabaix & Josep M. Vilarrubia & David Weinstein, 2007. "Trade patterns, trade balances and idiosyncratic shocks," Working Papers 0721, Banco de España;Working Papers Homepage.
  4. Dani Rodrik, 1997. "Has Globalization Gone Too Far?," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 57, January.
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