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Firms, Destinations, and Aggregate Fluctuations

  • Julian di Giovanni

    (International Monetary Fund)

  • Andrei A. Levchenko

    (University of Michigan and NBER)

  • Isabelle M�jean

    (Ecole Polytechnique and CEPR)

This paper uses a database covering the universe of French firms for the period 1990-2007 to provide a forensic account of the role of individual firms in generating aggregate fluctuations. We set up a simple multi-sector model of heterogeneous firms selling to multiple markets to motivate a theoretically-founded set of estimating equations that decompose firms' annual sales growth rate into different components. We find that the firm-specific component contributes substantially to aggregate sales volatility, mattering about as much as the components capturing shocks that are common across firms within a sector or country. We then decompose the firm-specific component to provide evidence on two mechanisms that generate aggregate fluctuations from microeconomic shocks highlighted in the recent literature: (i) when the firm size distribution is fat-tailed, idiosyncratic shocks to large firms contribute to aggregate fluctuations (the "granularity" hypothesis of Gabaix, 2011), and (ii) sizable aggregate volatility can arise from idiosyncratic shocks due to input-output linkages across the economy (Acemoglu et al., 2012). We find that firm linkages are approximately twice as important as granularity in driving aggregate fluctuations.

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Paper provided by Research Seminar in International Economics, University of Michigan in its series Working Papers with number 630.

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Length: 47 pages
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Handle: RePEc:mie:wpaper:630
Contact details of provider: Postal: ANN ARBOR MICHIGAN 48109
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  16. Daron Acemoglu & Vasco M. Carvalho & Asuman E. Ozdaglar & Alireza Tahbaz-Salehi, 2012. "The Network Origins of Aggregate Fluctuations," Levine's Working Paper Archive 786969000000000359, David K. Levine.
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  22. Stijn Van Nieuwerburgh & Hanno Lustig & Bryan Kelly, 2014. "Firm Volatility in Granular Networks," 2014 Meeting Papers 253, Society for Economic Dynamics.
  23. Julian di Giovanni & Andrei A. Levchenko, 2008. "Putting the Parts Together: Trade, Vertical Linkages, and Business Cycle Comovement," Working Papers 580, Research Seminar in International Economics, University of Michigan.
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